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HQ 226729

June 7, 1996

VES-13-18-RR:IT:EC 226729 GEV


Chief, Liquidation Section
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94126

RE: Vessel Repair Entry No. 110-6461683-9; PRESIDENT JEFFERSON; Proration; Repairs; 19 U.S.C. ? 1466; Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (1994)

Dear Sir:

This is in response to your memorandum dated January 30, 1996, forwarding a petition for review of Headquarters Ruling No. 113501, dated October 24, 1995, on the above-referenced vessel repair entry. You request our review with respect to numerous expenditures contained therein. Our ruling is set forth below.


The PRESIDENT JEFFERSON is a U.S.-flag containership owned and operated by American President Lines, Inc. The applicant contends that the subject vessel encountered heavy weather while en route on a loaded passage from Seattle, Washington, to Yokohama, Japan, during December 7-20, 1994, resulting in damage to the foremast, containers on board, and various deck fittings. Temporary and some permanent repairs were performed by the crew at sea and at Yokohama where the vessel arrived on December 21, 1994. The vessel departed Yokohama on the same day of its arrival and then proceeded to Hyundai Mipo Dockyard Co., Ltd. in Ulsan, Korea, where it incurred foreign shipyard expenditures during December 31, 1994 - January 12, 1995. Subsequent to the completion of the work in question, the vessel arrived in the United States at Seattle, Washington, on February 4, 1995. A vessel repair entry was timely filed.

Pursuant to an authorized extension of time, an application for relief with supporting documentation was timely filed. Customs rendered its decision on the application for relief pursuant to Headquarters Ruling 113501, dated October 24, 1996. A petition for review of the aforementioned ruling, dated January 12, 1996, was timely filed. You ask that we review the
following items appearing on Hyundai Mipo Dockyard Co., Ltd. invoice no. 945891, dated January 19, 1995, for which the petitioner seeks relief: Item Nos. 002-123, 201, 218, 219, 220, 222, 223, 229, 335, 336 and 412. In addition, you ask that we review charges incurred for overseas telephone calls appearing on p. 8 of the spreadsheets included in the documentation you forwarded.


Whether the foreign costs for which the petitioner seeks relief are dutiable pursuant to 19 U.S.C. ? 1466 as set forth in Headquarters Ruling 113501.


Title 19, United States Code, ? 1466, 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..."

Item Nos. 002-123 (excluding Item no. 113), cover the costs of the following general services/drydocking expenses incurred during the period of time the subject vessel was in the shipyard:

Item No. 002 - Insurance
Item No. 007 - Security
Item No. 101 - Lay Berth
Item No. 102 - Telephone Services (including the overseas calls in question)
Item No. 103 - Fire Watch
Item No. 104 - Fireline Water
Item No. 106 - Garbage Removal
Item No. 107 - Crane Service
Item No. 108 - Shore Power
Item No. 109 - A/C and Provisional Reefer Cooling Water Item No. 110 - Fresh Water Supply
Item No. 112 - Tugboats/Pilots
Item No. 114 - Ship's Service Air
Item No. 116 - Engine Room Bilge Pumping to Holding Tank
Item No. 117 - Gas Free Certificate
Item No. 118 - Temporary Lighting and Ventilation Item No. 121 - Steam Heat to Quarters
Item No. 122 - Distilled Water Supply
Item No. 123 - Reballast Vessel to Undock Item No. 201 - Drydock Vessel - ABS/USCG Inspection

The above costs were held to be dutiable on a pro rata basis which the petitioner states, "...has no support whatsoever in the statute, regulations or case law." (See petition at p. 3) We disagree. Such treatment is well-founded in all three of the aforementioned authority inasmuch each authorizes Customs assessment of duty on the "expenses of repairs". (See 19 U.S.C. and Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484 (CIT 1993), 44 F.3d 1539 (CAFC 1994)) With respect to the aforementioned statement of the petitioner, upon reviewing the petition it is readily apparent that the focus of his argument is what he perceives is Customs misapplication of the court's decision in Texaco, supra. However, the petition is unclear as to how Customs allegedly misapplied this decision. If the petitioner is arguing that drydocking is never a part of the "but for" test established by the court in Texaco, supra, or, in the alternative, that in the subject entry the drydocking expenses incurred were unrelated to any dutiable repairs, both arguments fail for the reasons set forth below.

In Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484 (1993), the issue before the U.S. Court of International Trade (CIT) was whether costs for post-repair cleaning and protective coverings incurred pursuant to dutiable repairs constituted "expenses of repairs" as that term is used in 19 U.S.C. ? 1466. In holding that the costs at issue were dutiable as "expenses of repairs" the court adopted the "but for" test proffered by Customs; that is, these costs were an integral part of the dutiable repair process and would not have been necessary "but for" the dutiable repairs.

On appeal, the U.S. Court of Appeals for the Federal Circuit (CAFC) issued a watershed decision which not only affirmed the opinion of the CIT regarding the specific expenses at issue, but also provided clear guidance with respect to the interpretation of 19 U.S.C. ? 1466, hence, Customs administration of that statute. In upholding the "but for" test adopted by the CIT, the CAFC stated:

"...the language expenses of repairs' is broad and unqualified.
As such, we interpret expenses of repairs' as covering all expenses (not specifically excepted in the statute) which, but for dutiable repair work, would not have been incurred.
Conversely, expenses of repairs' does not cover expenses that would have been incurred even without the occurrence of dutiable repair work. As will be more clearly illustrated below...the but for' interpretation accords with what is commonly understood to be an expense of repair." 44 F.3d 1539, 1544.

The CAFC discussed at length the case of United States v. George Hall Coal Co., 142 F. 1039 (1906), heavily relied upon by the plaintiff/appellant for the proposition that drydocking expenses are not an expense of repair and therefore are not dutiable. It is noteworthy that the published decisions in George Hall Coal (T.D. 24932 (1904), aff'd 134 F. 1003, T.D. 26038

(1905), aff'd 142 F. 1039, T.D. 27068 (2nd Cir. 1908)) address jurisdictional issues and are silent as to the dutiability of drydocking expenses. 44 F.3d 1539, 1545 at fn. 5 However, the CAFC examined the rationale provided in a December 31, 1903, unpublished decision of the Department of Treasury Board of General Appraisers (Board) which is the underlying decision in the aforementioned published cases. The CAFC stated that this examination was necessary because "...subsequent decisions of the Court of International Trade and its predecessor, the Customs Court, have viewed George Hall Coal as standing for the proposition that the cost of a place to do work (i.e., a drydock) is not dutiable as an expense of repairs, which in fact it does not." 44 F.3d. 1539, 1546 at fn. 6 In examining this decision the court noted that, "...the Board held the dry-docking expense was not subject to the vessel repair duty because the Board found that the expense would have been incurred irrespective of whether or not dutiable repairs were performed." 44 F.3d 1539, 1546 The CAFC went on to state, "George Hall Coal simply stands for the proposition that expenses that would have been incurred irrespective of whether or not dutiable repairs are performed are not dutiable as an expense of repairs." Id. It therefore concluded, "...George Hall Coal is entirely consistent with the but for' interpretation of the statute." Id.

In this case, the evidence indicates that the drydocking was done to effect repairs as well as survey inspections. The Hyundai Mipo Dockyard Co., Ltd. invoice shows that the hull was prepared for painting and painted while in drydock, bow thruster repairs were made while in drydock, and the stern tube outer seal was removed, overhauled and replaced while in drydock. (See Items 225, 226, 301 and 304 of that invoice). Furthermore, the contracts for C.H. Murphy Inc., Molnar Service Co., Inc., and Seamar Electronics Inc. refer to the work to be performed "during the drydock repair period." We note that the petitioner admits that the hull painting was dutiable on the entry documents. The petitioner makes a similar admission with respect to the overhaul of the stern tube and the bow thruster seal and anode replacements.

Consequently, if the petitioner's argument is that drydocking expenses always fall outside the "but for" test, that point was answered in the negative by the court in Texaco in footnotes 5 and 6 of the opinion discussed above. If the petitioner's argument is that the drydocking expenses in this case are unrelated to contemplated or performed repairs, the evidence, discussed above, contradicts that argument.

In recognizing the inequities owing to a total assessment of duty on expenses that are also attributed, in part, to non-dutiable costs, on p. 8 of Headquarters Ruling 113474, dated October 24, 1995, and cited by the petitioner, Customs stated, in pertinent part:

"A "but for" test was utilized by the court in the Texaco [case], supra., which test bases dutiability under the vessel repair statute upon findings that but for dutiable repair operations, an associated expense would not have been incurred. To be sure, in a great many vessel repair cases which include dry dock expenses there is at least some non-dutiable element which could justify placing a vessel in dry dock. We understand from the
decision of the CAFC in Texaco, supra., that dock charges are non-dutiable if the underlying reason for dry-docking is not subject to duty, and that such charges are dutiable if dutiable operations underlie the docking. Proper implementation of the decision of the court requires that we consider the duty consequences in circumstances in which a mixed justification for dry- docking is present."

"Customs has experience in duty determinations in another area involving a mixed-purpose vessel repair expense. Under the rationale provided by a long-standing published ruling (C.I.E. 1188/60) the cost of obtaining a gas- free certification, a necessary precursor to the initiation of any hot work
(welding) which may be necessary, constitutes an expense which is associated with shipyard operations. Since the expense is incurred without respect to whether the hot work to follow might constitute dutiable repair work, or is in connection with duty-free modification work, it is the practice of Customs in liquidating such expenses to apportion the gas-freeing charges between the cost of items which are remissible and those which are subject to duty.
We are guided by the determination of the court in Texaco, supra., to apply the same formula to mixed-purpose dry-dock expenses. Accordingly, the cost associated with item 14 should be apportioned to reflect the dutiable and non-dutiable foreign costs in this entry."

The vessel repair entry now under consideration which, as stated above, covers "mixed-purpose" expenses, was filed after the CAFC decision in Texaco. In Headquarters Memorandum 113350, dated March 3, 1995, published in the Customs Bulletin and Decisions on April 5, 1995 (Vol. 29, No. 14, p. 24), we stated in pertinent part:

"All vessel entries filed with Customs on or after the date of that decision
[the CAFC decision in Texaco, December 29, 1994] are to be liquidated in accordance with the full weight and effect of the decision (i.e., costs of post-repair cleaning and protective coverings incurred pursuant to dutiable repairs are dutiable and all other foreign expenses contained within such entries are subject to the "but for" test)."

In accordance with Headquarters Ruling 113474 and Memorandum 113350, and as your forwarding memorandum states, the general services/drydocking charges in question, including the overseas telephone calls for which the petitioner seeks relief, should be prorated between the dutiable and nondutiable costs associated with the drydocking. Notwithstanding the petitioner's claim to the contrary, the method of prorating is workable administratively as was described in Headquarters Ruling 113474, supra: the drydocking costs "should be apportioned to reflect the dutiable and non-dutiable foreign costs in this entry." For example, if, aside from the subject "drydocking costs," as described supra, fifty percent of the costs of that particular drydocking were dutiable and fifty percent were nondutiable, then fifty percent of the subject "drydocking
costs," as described supra, would be dutiable and fifty percent would be nondutiable. (See Headquarters Ruling 226826, dated May 2, 1996) This is in accord with C.I.E. 1188/60 which states, in pertinent part, "In liquidation, this charge [of obtaining a gas-free certificate] should be apportioned between the costs which are to be remitted and those for which relief is not warranted and duty assessed on that portion of the charge applicable to items which are not being remitted."

The following costs for which the petitioner seeks relief also were held to be dutiable on a pro rata basis:

Item No. 218 - Salt Water Double Bottom Tanks, ABS & USCG Inspection
Item No. 219 - Forepeak Void - ABS & USCG Inspection Item No. 220 - Aft Peak Tank
Item No. 222 - Fuel Oil Wing Tanks (1000 BBLS AVG.) - ABS & USCG Inspection
Item No. 223 - Salt Water Ballast Deep Tanks - ABS & USCG Inspection

The petitioner contends that, "...these five items should not be pro-rated, but rather should be afforded duty-free treatment as being mandatory regulatory inspections." (See petition at p. 2) Upon reviewing the record, we note that the invoice descriptions under each item are not indicative of dutiable work and that these charges were incurred pursuant to the nondutiable drydock survey. Accordingly, these five items are nondutiable.

Item 113 is entitled, "DOCK TRIAL" and provides as follows:

"Provide additional mooring for carrying out four hour dock trial upon completion of main engine and auxiliary support system inspections, and modifications. Gangway to be swung clear of vessel, and propeller and bow thruster tunnel areas to be kept clear. Necessary personnel, according to normal yard practice, are to be kept in attendance during this trial."

The petitioner states that, "[t]he Dock Trial was limited to testing of non-dutiable work; no dutiable work was tested." However, this statement is not corroborated by the above-referenced invoice description, nor any other documentary evidence contained within the record. Although this item may have included the trial of nondutiable work, the petitioner's statement that it was limited to that work is devoid of evidentiary support. Customs has long-held that relief may not be granted in the absence of a segregation of dutiable and non-dutiable costs. (C.I.E.s 1325/58 and 565/55) Accordingly, Item 113 remains dutiable in its entirety.

Item 229 is entitled, "HATCH COVER GASKET REPAIR". The petitioner states:

"This is a transportation item. There were no repairs included in this item. It is the removal and replacement of the hatch covers to and from to a suitable location for inspection."

"Pre-'Texaco', this item has been afforded non-dutiable status. For reasons stated above we do not believe Texaco applies, therefore this item, in our opinion, should be duty-free." (See petition at p. 3)

No documentary evidence has been submitted to support the petitioner's position. As discussed above, Texaco does apply to this entry therefore whatever dutiable status that may have been accorded this expense prior to that court case is now irrelevant. Furthermore, upon examining the invoice description of this item number, we note that contrary to the petitioner's contention, the work in question involves more than mere transportation. The invoice provides as follows:

"Remove all hatch covers ashore or to floor of the drydock. Block up covers and clean for underside inspection. Inspect all hatch covers and report to owners superintendant [sic]. Any authorized repairs to be covered under a point' item." (Emphasis added)

It is therefore readily apparent that cleaning was performed in conjunction with transportation under this item. In addition, the cleaning was done prior to dutiable repairs to the hatch cover rubber packing and channels (See Item 229.1 of the invoice). Notwithstanding
Texaco, supra., under which this item would be held dutiable, Customs has long-held cleaning done in preparation of dutiable repairs to be dutiable. (C.I.E.s 51/61, 429/61 and 596/62). Accordingly, Item 229 remains dutiable.

Items 335 and 336 both cover the use of a solvent to remove oil sludge deposits from the lube oil cooler. We note that both items contain the statement, "This is a cleaning item only, no repairs." In analyzing the dutiability of foreign vessel work, the Customs Service has consistently held that cleaning is not dutiable unless it is performed as part of, in preparation for, or in conjunction with dutiable repairs or is an integral part of the overall maintenance of the vessel. E.g., Headquarters Ruling Letter 110841, dated May 29, 1990 (and cases cited therein). The Customs Service considers work performed to restore a part to good condition following deterioration or decay to be maintenance operations within the meaning of the term repair as used in the vessel repair statute. See generally, Headquarters Ruling Letter 106543, dated February 27, 1984; C.I.E. 142/61, dated February 10, 1961.

The dutiability of maintenance operations has undergone considerable judicial scrutiny. The United States Court of Customs and Patent Appeals, in ruling that the term repair as used in the vessel repair statute includes "maintenance painting," gave seminal recognition to the
dutiability of maintenance operations. E. E. Kelly & Co. v. United States, 55 Treas. Dec. 596, T.D. 43322 (C.C.P.A. 1929). The process of chipping, scaling, cleaning, and wire brushing to remove rust and corrosion that results in the restoration of a deteriorated item in preparation for painting has also been held to be dutiable maintenance. States Steamship Co. v. United States, 60 Treas. Dec. 30, T.D. 45001 (Cust. Ct. 1931).

The United States Customs Court examined whether the scraping and cleaning of Rose Boxes constituted dutiable repairs. Northern Steamship Company v. United States, 54 Cust. Ct. 92, C.D. 1735 (1965). Rose Boxes are parts fitted at the ends of the bilge suction to prevent the suction pipes from being obstructed by debris. In arriving at its decision, the court focused on whether the cleaning operation was simply the removal of dirt and foreign matter from the boxes or whether it resulted in the restoration of the part to good condition after deterioration or decay. Id. at 98. The court determined that the cleaning did not result in the restoration of the boxes to good condition following deterioration and consequently held that the work was not subject to vessel repair duties. Id. at 99. The Customs Service has ruled that the regular cleaning of filters in most instances does not result in liability for duty. See Headquarters Ruling Letter 107323, dated May 21, 1985.

From these authorities, we determine that the costs of cleaning the lube oil cooler covered by Items 335 and 336 are subject to duty under 19 U.S.C. ?1466. The term deterioration is defined to mean degeneration, which in turn denotes declined function from a former or original state. See The American Heritage Dictionary of the English Language 376, 387 (2d ed. 1985). The collection of oil sludge deposits results in a diminished engine function. The removal of these deposits through the use of a solvent results in a restoration of the lube oil cooler to good condition. Such an operation can be distinguished from cleaning a Rose Box or other filter, for the collection of debris by these parts results not in a diminution of function, but alternatively demonstrates the proper function of the part. (See also Headquarters Rulings 111821, 111822 and 111903 wherein Customs held the removal of carbon and oil deposits from the main engine scavenger spaces to be a dutiable maintenance operation) Accordingly, Items 335 and 336 constitute dutiable maintenance operations.

Item 412 is entitled, "BOW THRUSTER" and provides as follows: "1. Checked & megger tested electric cable & bow thruster motor. 2. Tested good order." The petitioner states that with respect to this item, "No repairs were performed." (See petition at p. 3) It is further stated that, "[t]his item, being a mandatory regulatory requirement, should be non-dutiable." Id. As to the former statement, the record does not support such a claim (See Items 304 and 343 of the shipyard invoice covering dutiable work done to the bow thruster). As to the latter, we also note that neither the shipyard invoice nor the survey documentation included within the petitioner's submissions support such finding. Accordingly, Item 412 remains dutiable.


The foreign costs for which the petitioner seeks relief are dutiable pursuant to 19 U.S.C. ruling.


William G. Rosoff

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