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HQ 116202

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May 4, 2004

VES-13-18-RR:IT:EC 116202 GOB

CATEGORY: CARRIER

Chief, Vessel Repair Unit
U.S. Customs and Border Protection
423 Canal Street
New Orleans, LA 70130

RE: Vessel Repair Entry C20-0038538-8; Tug HONCHO; 19 U.S.C. 1466; Protest No. 2002-02-100861

Dear Sir:

This is in response to your memorandum of April 5, 2004, forwarding for our review the protest filed by Puerto Rico Towing & Barge Co. (“PRT”) with respect to Vessel Repair Entry C20-0038538-8. Our ruling follows.

FACTS:

The tug HONCHO (the “vessel”) is a U.S.-flag tug, the demise owner of which is PRT. It incurred foreign shipyard costs in April and May of 2001. The vessel arrived in San Juan, Puerto Rico on May 8, 2001. A vessel repair entry was timely filed.

By letter of May 24, 2002, your office granted in part the application. By submission of August 21, 2002, the demise owner of the vessel filed a protest and application for further review.

ISSUE:

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

LAW AND ANALYSIS:

19 U.S.C. 1466 provides for the payment of duty at a rate of fifty percent ad valorem on the cost of foreign repairs to vessels documented under the laws of the United States to engage in foreign or coastwise trade, or vessels intended to be employed in such trade.

Protestant’s Claims

The protestant makes the following claims: 1. All items for which duties were paid were performed as required by the U.S. Coast Guard to maintain the vessel’s load line certification; 2. Items for which duties were assessed were not dutiable repairs under 19 U.S.C. 1466(a) based upon Texaco Marine Services, Inc. v. U.S., 44 F. 3d 1539 (Fed. Cir. 1994); and 3. Because the repair costs incurred at the foreign shipyard were actually more costly than similar domestic services, the purposes underlying 19 U.S.C. 1466(a) would not be served by imposing vessel repair duties.

Analysis of Protestant’s Claims

The protestant’s first argument is that certain costs were performed in conjunction with a drydocking and survey required by the ABS, and for maintenance of class as required by contract by the U.S. Government. In support of this claim, the protestant cites Customs Service Decision (C.S.D.) 79-277 and HQ 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 HQ 112779, with increasing frequency C.S.D. 79-277 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.

The protestant’s second claim is that expenses covering certain work were not “expenses of repairs” within the meaning of the vessel repair statute. The protestant contends that certain 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 applicant’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 held “expenses of repairs” as that term is found in 19 U.S.C. § 1466(a) to “cover all expenses, not specifically excepted in the statute, which, but for dutiable repair work, would not have been incurred ”

With respect to the protestant’s third claim that repair costs at the foreign shipyard were actually more expensive than similar domestic services and 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. This claim is not a basis for relief under the vessel repair statute.

Our analysis of these claims is consistent with the analysis in HQ 115443 dated January 16, 2002.

Determinations

Based upon the evidence of record we make the following determinations on the invoices and items for which you have requested our determinations, i.e., those identified in your forwarding memorandum.

With respect to ABS Americas invoice # 1601320006 dated June 6, 2001, we find that the annual loadline survey and the “periodical drydocking / UWILD survey” are nondutiable. The damage repair survey and the special hull survey are dutiable. The first four items on this invoice are to be prorated. All “miscellaneous hull repairs,” as detailed on page three of the ABS Report No. SJ1734, are dutiable repairs.

The following item numbers listed on the Anabalca invoice dated May 8, 2001 are dutiable costs for repairs or materials: 7, 8, 9, 10, 11, 12, 13, 14, 18, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 34, 35, 36, and 37. The costs of the following item numbers on the same invoice are to be prorated between dutiable and nondutiable costs: 1, 2, 3, 4, 5, 6, 15, 16, 17, 19, 20, 33, and 38.

Items 6 and 14 on the Nadelca invoice dated May 7, 2001 (Invoice # 20010507-02) are dutiable materials and equipment.

HOLDING:

The costs for which the protestant seeks relief are dutiable in part under 19 U.S.C. § 1466 as discussed in the Law and Analysis section of this ruling.

In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), 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 the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Glen E. Vereb
Chief

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