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HQ 115441

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January 16, 2002

VES-13-18-RR:IT:EC 115441 GEV

CATEGORY: CARRIER

Chief, Vessel Repair Unit
U.S. Customs Service
423 Canal Street
New Orleans, Louisiana 70130

RE: Protest No. 4909-01-100024; Vessel Repair Entry No. C49- 0024473-1; PUNTA BORINQUEN; V-1; 19 U.S.C. § 1466

Dear Sir:

This is in response to your memorandum dated July 23, 2001, forwarding for our review the above-referenced protest. Our ruling on this matter is set forth below.

FACTS:

The PUNTA BORINQUEN is a U.S.-flag tug owned by Tugz International L.L.C. (“Tugz”) and operated by a Tugz affiliate, Puerto Rico Towing & Barge Co. The vessel incurred foreign shipyard costs in August of 2000. The vessel arrived in the United States at San Juan, Puerto Rico, on August 27, 2000. A complete vessel repair entry was timely filed. A request for an extension of time to file an application for relief from duties assessed pursuant to the vessel repair statute was untimely submitted to your office and therefore denied by your letter dated December 21, 2000. The entry was subsequently forwarded for liquidation which occurred on April 6, 2001.

A protest dated July 3, 2001, with supporting documentation (Exhibits A-R) was timely filed by Tugz seeking relief based on the following: four alternative arguments: (1) all of the work items in question were performed in conjunction with a drydocking and survey required by the U.S. Coast Guard and/or the American Bureau of Shipping (ABS); (2) certain of the work items do not constitute “repairs” for purposes of the vessel repair statute; (3) certain of the work items are “consumable
supplies” and thus outside the scope of the vessel repair statute; and (4) given that repair costs at the foreign shipyard were actually more expensive than similar services were they performed at a U.S. shipyard, the purposes underlying the vessel repair statute would not be served by imposing duties on the foreign shipyard services.

ISSUE:

Whether the costs for which the protestant seeks relief are dutiable under 19 U.S.C. § 1466.

LAW AND ANALYSIS:

Title 19, United States Code, § 1466(a), provides in pertinent part for the payment of an ad valorem duty of 50 percent of the cost of "...equipments, or any part thereof, including boats, purchased for, or the repair parts or materials to be used, or the expenses of repairs made in a foreign country upon a vessel documented under the laws of the United States..."

The foreign costs for which relief is sought are listed on an invoice from Astilleros Navales Bahia Las Calderas (“ANABALACA”) shipyard located at Las Calderas, Dominican Republic. (Exhibit P) In addition, the protestant also seeks relief for other costs listed on an invoice from Nadelca, its local agent in the Dominican Republic. (Exhibit Q)

The protestant’s first argument upon which it bases its request for relief is that every cost appearing on the above-referenced invoices (Exhibits P and Q) was performed in conjunction with a drydocking and survey required by the U.S. Coast Guard for Load Line Certification and/or a vessel classification society, specifically the American Bureau of Shipping (ABS), for maintenance of class. In support of this claim, the protestant has submitted documentation from the ABS to this effect (Exhibits M, N, and O), and cited to Customs Service Decision (C.S.D.) 79-277 and Customs ruling letter 112779, dated July 23, 1996.

In regard to the dutiability of inspection/survey costs, we note that C.S.D. 79-277 stated that, "[i]f the survey was undertaken to meet the specific requirements of a governmental entity, classification society, insurance carrier, etc., the cost is not dutiable even if dutiable repairs were effected as a result of the survey."

As discussed in Customs ruling letter 112779 cited by the protestant, with increasing frequency, this ruling has been utilized by vessel owners seeking relief not only from charges appearing on an American Bureau of Shipping (ABS) or U.S. Coast Guard invoice (the actual cost of the inspection) but also as a rationale for granting nondutiability to a host of inspection-related charges appearing on a shipyard invoice. Our position with respect to this ruling is as follows.

C.S.D. 79-277 discussed the dutiability of certain charges incurred while the vessel underwent biennial U.S. Coast Guard and ABS surveys. That case involved the following charges:

ITEM 29
(a) Crane open for inspection
(b) Crane removed and taken to shop. Crane hob and hydraulic unit dismantled and cleaned
(c) Hydraulic unit checked for defects, OK. Sundry jointings of a vessel's spare renewed. (d) Parts for job repaired or renewed.
(e) Parts reassembled, taken back aboard ship and installed and tested.

In conjunction with the items listed above, we held that a survey undertaken to meet the specific requirements of a governmental entity, classification society, or insurance carrier is not dutiable even when dutiable repairs are effected as a result of such a survey. We also held that where an inspection or survey is conducted merely to ascertain the extent of damages sustained or whether repairs are deemed necessary, the costs are dutiable as part of the repairs which are accomplished.

It is important to note that only the cost of opening the crane was exempted from duty by reason of the specific requirements of the U.S. Coast Guard and the ABS. The dismantling and cleaning of the crane hob and hydraulic unit was held dutiable as a necessary prelude to repairs. Moreover, the testing of the hydraulic unit for defects was also found dutiable as a survey conducted to ascertain whether repairs were necessary. Although the invoice indicated that the hydraulic unit was "OK," certain related parts and jointings were either repaired or renewed. Therefore, the cost of the testing was dutiable.

We emphasize that the holding exempts from duty only the cost of a required scheduled inspection by a qualifying entity (such as the U.S. Coast Guard or the ABS). Moreover, we note that C.S.D. 79-277 does not exempt repair work done by a shipyard in preparation of a required survey from duty. Nor does it exempt from duty the cost of any testing by the shipyard to check the effectiveness of repairs found to be necessary by reason of the required survey.

As to the protestant’s first claim, while we concur that the documentation submitted by the protestant in this regard establishes that a nondutiable drydocking/survey was conducted by the ABS, as discussed above, neither C.S.D. 79-277 nor Customs ruling letter 112779 afford the protestant the requisite authority upon which relief may be granted in regard to the shipyard work and related fees listed on Exhibits P and Q, respectively. Furthermore, we note that the ABS documentation also lists a damage/repair survey that was performed in conjunction with miscellaneous hull repairs which are reflected on Exhibit P and for which related drydocking/general services charges also appear on Exhibits P and Q (such charges to be apportioned between dutiable and nondutiable costs in accord with our oft-stated position set forth in Customs ruling letters 115024 and 115039, dated June 26, 2000). None of the documentation submitted for our review indicates that any of the charges listed on either Exhibits P or Q were nondutiable work attributed solely to the nondutiable drydocking/ survey as opposed dutiable work attributed to the aforementioned dutiable damage/repair survey. Pursuant to C.I.E.s 1325/58 and 565/55, costs may not be remitted where the invoice does not show a breakdown between those costs that are dutiable and those that are not. Accordingly, the protestant’s first argument does not provide a sufficient justification for the granting of relief.

The protestant’s second claim for relief concerns expenses covering certain work alleged not to constitute “repairs”. The work specified by the protestant in this regard includes Items 6-11 and 26 on the ANABALCA invoice (Exhibit P). The protestant contends that these work items are expenses associated with “routine cleaning” or “restoration because of deterioration and damage” and are therefore not dutiable pursuant to Texaco Marine Services, Inc. v. United States, 44 F.3d 1539 (1994). We disagree not only with the protestant’s characterization of these expenses, but also with their interpretation of the court’s decision in Texaco, supra.

As to what constitutes a repair for purposes of 19 U.S.C. § 1466, Customs has long-been guided by the Supreme Court’s decision in Gagon v. United States, 193 U.S. 451 (1904) wherein the Court stated that “[t]he word ‘repair’contemplates an existing structure which has become imperfect by reason of the action of the elements, or otherwise.” Gagon, 193 U.S. at 457, quoted in United States v. Admiral Oriental Line, 18 C.C.P.A. 137, T.D. 44359 (1930). (see also E.E. Kelly & Co. v. United States, 17 C.C.P.A. 30, 32, T.D. 43322 (1929)) As to the Texaco decision, it is important to note that the court addressed not what constitutes a repair, but rather what is meant by “expenses of repairs” as that term is found in 19 U.S.C. § 1466(a) holding it to “cover all expenses, not specifically excepted in the statute, which, but for dutiable repair work, would not have been incurred,”

Items 6-11 and 26 on the ANABALCA invoice (Exhibit P), cover the following work: handscrape underwater hull to remove excessive marine growth (Item 6); sandblast underwater area of shell plates (Item 7); apply paint to blasted areas of bottom shell (Item 8); paint draft and plimsoll marks (Item 10); crop and renew wasted anodes (Item 11); and clean, polish, grind edge of blades on P/S props, repair one fracture in stbd. prop blade as directed (Item 26). With respect to the work described within each of these items, Customs has previously held all such work to be dutiable maintenance. (Customs ruling letters 112777, dated October 4, 1993, 226737, dated March 12, 1996, and 114676, dated May 10, 1999, see also C.I.E. 910/59) Furthermore, it is noteworthy that the shipyard invoice specifically describes the work in Item 26 as including the “repair of one fracture in stbd. prop blade”. (Emphasis added) This description unquestionably denotes a dutiable repair.

The protestant’s third claim seeks relief for the following items alleged to be “consumable supplies” and therefore beyond the purview of 19 U.S.C. § 1466: ANABALCA invoice (Exhibit P) Item nos. 4 (shore power during shipyard visit) and 19 (telephone and fax services); and Nadelca invoice (Exhibit Q) Item nos. 1 (arrival expenses), 2 (berth space fee), 3 (migration charges for crew members), 4 (migration services for crew members), 5 (agency fee), 6 (truck rental services), 6 (portable phone services), 8 (taxi services), 9 (hotel meal expenses for ABS surveyor), 10 (Customs port authority fee), 11 (agency fee), 12 (port departure expenses), 12.1 (Fresh water supplied at departure), and 13 (port departure fee).

In support of the position that the above-listed items are consumable supplies and therefore nondutiable under 19 U.S.C. § 1466, the protestant cites to C.S.D. 80-197 which held that commodities used as a lubricant in the compressor of a refrigeration system and as a refrigerant were “consumable supplies” and therefore not dutiable. It should be noted that C.S.D. 80-197 is premised upon, and cites as authority, Treasury Decision (T.D.) 39340 which provides that, “It appears to be well established that consumable supplies—i.e., provisions consumed by the passengers and crew of a vessel and all commodities which are consumed in their use---constitute ‘sea stores.’” (See also Southwestern Shipbuilding Co. v. United States, 13 Cust. Ct. App. 74, T.D. 40934 (1925)) It should be noted that T.D. 39340 further provides that although sea stores are not subject to duty under 19 U.S.C. § 1466, “articles which are purchased for repair purposes on a vesselthough they come under the heading of ‘sea stores,’ would be subject to duty.” In regard to the above-listed items, we note that with the exception of the fresh water referenced in Item 12.1 of Exhibit Q, none of these expenditures are “consumed by the passengers and crew of a vessel”. Furthermore, with the exception of the aforementioned fresh water, these charges were incurred pursuant to dutiable shipyard repair work and therefore rather than constituting “consumable supplies”, are drydocking/general services costs which Customs apportions as discussed above.

With respect to the protestant’s fourth argument (i.e., that repair costs at the foreign shipyard were actually more expensive than similar services were they performed at a U.S. shipyard therefore duties should not be assessed pursuant to 19 U.S.C. § 1466), the statute does not vest in Customs the requisite discretion to administer such a position. To the contrary, as noted above, the statutory language found in 19 U.S.C. § 1466(a) directs that the duty assessment provisions found therein apply to “a vessel documented under the laws of the United States..." Since the PUNTA BORINQUEN is a U.S.-flag vessel, the aforementioned statutory provisions apply and the protestant’s argument in this regard is therefore without merit.

HOLDING:

With the exception of Item 12.1 of Exhibit Q, the costs for which the protestant seeks relief are dutiable under 19 U.S.C. § 1466. The drydocking/general services costs contained within this entry are apportioned accordingly.

The protest is granted in part and denied in part.

In accordance with § 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing this decision. Sixty days from the date of the decision, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Larry L. Burton
Chief

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