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HQ 227095





April 10, 1997

VES-13-18-RR:IT:EC 227095 GEV

CATEGORY: CARRIER

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

RE: Protest No. 3001-96-100406; Vessel Repair Entry No. 110-6461660-7; SEA-LAND VOYAGER; V-228; 19 U.S.C. ? 1466

Dear Sir:

This is in response to your memorandum dated July 2, 1996, forwarding the above-referenced protest with supporting documentation for our review. Our ruling is set forth below.

FACTS:

The SEA-LAND VOYAGER is a U.S.-flag vessel operated by Sea-Land Service, Inc. ("Sea-Land") which incurred costs for foreign work performed during February and March of 1995. Subsequent to the completion of the work the vessel arrived in the United States at Tacoma, Washington, on March 26, 1995. A vessel repair entry was timely filed.

The operator, in seeking relief from the duty provisions of the vessel repair statute (19 U.S.C. ? 1466), filed a short cover letter forwarding various invoices and worksheets which reflect proposed dispositions, but no specific plea for relief from duty was filed. Consequently, although the aforementioned letter denominated itself as an Application for Relief, it was deemed by Customs not to rise to that level and denied in its entirety (Headquarters ruling letter 113587, dated February 9, 1996). The entry was forwarded for liquidation which occurred on March 15, 1996. A protest, dated June 10, 1996, was timely filed. The protestant seeks relief for a myriad of foreign costs covered by the subject entry.

ISSUE:

Whether evidence is presented sufficient to grant the protest regarding the dutiability of certain foreign costs under 19 U.S.C. ? 1466.

LAW AND ANALYSIS:

Title 19, United States Code, ? 1466 (19 U.S.C. ? 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..."

At the outset we note that upon reviewing the 15-page worksheet prepared by Sea-Land which was submitted with their protest and annotated to reflect their claims, it is readily apparent that many of the foreign costs covered by the subject vessel repair entry are conceded to be dutiable. Consequently, this ruling will address only those items denoted as "Free" by the Protestant on the worksheet.

The vast majority of the protestant's claims pertain to costs for transportation, rigging, staging and other such costs (e.g., "standby") which were incurred in conjunction with costs the Protestant denoted as "Dutiable" on the worksheets. In this regard we refer to Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484 (1993), where 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 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.

In reaching the above determination, the CAFC steadfastly rejected the non-binding judicial authority relied upon by the plaintiff/appellant. Specifically, the court addressed the following: Mount Washington Tanker Co. v. United States, 505 F.Supp. 209 (CIT 1980) which held that transportation compensation for members of a foreign repair crew performing dutiable repairs was not dutiable as an expense of repairs; American Viking Corp. v. United States, 150 F.Supp. 746 (Cust.Ct. 1956) which held that the expense of providing lighting needed to perform a dutiable repair was not dutiable as an expense of the repair; and International Navigation Co. v. United States, 148 F.Supp. 448 (Cust.Ct. 1957) which held that transportation expenses for a foreign repair crew to travel to and from an anchored vessel being repaired was not dutiable as expenses of repairs. With regard to these three cases, the CAFC stated, "Seemingly, these expenses too would have been viewed as coming within the [vessel repair] statute if the court had used a "but for" approach." 44 F.3d 1539, 1547. The CAFC concluded, "Thus Mount Washington Tanker, like American Viking and International Navigation, was incorrectly decided." Id.

In addition to the above judicial authority, the CAFC discussed at length the case of United States v. George Hall Coal Co., 142 F. 1039 (1939), heavily relied upon by the plaintiff/ appellant, which held dry-docking expenses were not an expense of repair and therefore were not dutiable. Although this decision seemingly supported the position that the expenses at issue were dutiable, the CAFC examined the rationale provided in a December 31, 1903, unpublished decision of the Department of Treasury Board of General Appraisers (Board) upon which the court's decision was based. It 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.

Recognizing that the decision of the CAFC was not only dispositive of the expenses at issue, but also instructive as to Customs administration of the vessel repair statute with respect to the interpretation of the term "expenses of repairs" contained therein, the Assistant Commissioner, Office of Regulations and Rulings, issued a memorandum to the Regional Director, Commercial Operations, New Orleans (file no. 113308) dated January 18, 1995, published in the Customs Bulletin on February 8, 1995 (Customs Bulletin and Decisions, vol. 29, no. 6, at p. 59) In that memorandum, copies of which were disseminated to two other Customs field offices charged with the liquidation of vessel repair entries, it was stated that pursuant to the decision of the CAFC, a myriad of foreign repair expenses previously accorded duty-free treatment would, under certain circumstances, no longer receive such treatment. The memorandum further provided that any such affected costs contained in vessel repair entries not finally liquidated as of the date of the CAFC decision (December 29, 1994) should be liquidated as dutiable "expenses of repairs" provided they pass the "but for" test discussed above.

Subsequent to the publication of the above memorandum, on February 22, 1995, various representatives of U.S.-flag vessel owners/operators, including the Protestant, met with the Assistant Commissioner, Office of Regulations and Rulings. It was the collective opinion of the vessel owners/operators that the memorandum be rescinded, contending, inter alia, that it was violative of 19 U.S.C. ? 1625(c)(1) and 19 CFR Part 177. Upon further review of this matter, the Assistant Commissioner, Office of Regulations and Rulings, again issued a memorandum to the Regional Director, Commercial Operations Division, New Orleans (file no. 113350), dated March 3, 1995, published in the Customs Bulletin on April 5, 1995 (see Customs Bulletin and Decisions, vol. 29, no. 14, at p. 24) clarifying the January 18 memorandum with respect to Customs implementation of the CAFC decision. It provided that all vessel repair entries filed with Customs on or after the date of that decision 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). With respect to vessel repair entries filed prior to December 29, 1994, all costs for post-repair cleaning and protective coverings incurred pursuant to dutiable repairs are dutiable. It further provided that in view of the fact that carriers have relied on Customs rulings (some of which were based on court cases which the CAFC in Texaco held were incorrectly decided), and retroactive application would cause both the Government and the carriers a major administrative burden, Customs will not apply Texaco retroactively except as to the two issues directly decided by the court. All other costs contained within such entries are to be accorded that treatment previously accorded them by Customs prior to the decision of the CAFC in the Texaco case.

Parenthetically, we note that the CAFC decision was published in its entirety in the Customs Bulletin on March 8, 1995 (See Customs Bulletin and Decisions, vol. 29, no. 10, at p. 19).

Accordingly, upon reviewing those costs claimed to be nondutiable but which were conceded by the protestant to have been incurred in conjunction with dutiable repairs, we find the costs for transportation, rigging, staging and "standby" listed under the following item numbers to be dutiable pursuant to Texaco: 1; 11.a; 11.b; 11.c; 11.d; 15a & b; 24; 30; 31; 32; 33; 35; 36; 37; 38B2.1.4; and 38E (appearing on pp. 8 - 15 of the worksheets). Furthermore, in view of the dutiable tank repairs covered by Item No. 38E3.2.26, we find the tank cleaning costs in Item Nos. 38B3.H-1, 38B3.H-2 and 38B3.H-6 to also be dutiable pursuant to Texaco.

The transportation cost covered by Item No. 22.1b is dutiable in view of the fact that the ABS invoice fails to discern whether it is attributed to dutiable or nondutiable ABS surveys contained within the entry. In addition, the cost of gas-freeing in Item 38B2.2.4b is subject to proration pursuant to C.I.E.s 1188/60 and 429/61.

The following Item Nos. cover alleged nondutiable survey/inspection work reflected on Jurong Shipyard Ltd. job no. 21-7154 (VG 6745) and include other costs incurred in conjunction therewith: 38D4.2.16, 38D.M-25, 38D.M-26 and 38D.E01. 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."

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 non-dutiability to a host of inspection-related charges appearing on a shipyard invoice. In light of this continuing trend, we offer the following clarification.

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 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 (emphasis added).

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). In the liquidation process, Customs should go beyond the mere labels of "continuous" or "ongoing" before deciding whether a part of an ongoing maintenance and repair program labeled "continuous" or "ongoing" is dutiable.

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.

With respect to the four items in question, the Jurong Shipyard Ltd. documentation is itself uncontroverted evidence that the costs in question are dutiable shipyard work (i.e., adjustments/calibrations held to be dutiable pursuant to Headquarters ruling letter 110841, dated May 29, 1990) rather than the actual cost of required scheduled inspections by any of the aforementioned qualifying entities. Consequently, those four items are dutiable in their entirety.

We note the existence of certain general/port services contained within the subject entry (Item Nos. 5, 10, 38.A1 and 38A2 ). In regard to the latter (Item No. 38A2), such costs are directly related to dutiable repairs and therefore are dutiable pursuant to Texaco. With respect to the former (Item Nos. 5, 10 and 38.A1), since they are related to both dutiable and non-dutiable work, it is our position that such costs should be prorated between the dutiable and non-dutiable costs contained within this entry. (Headquarters ruling letters 226729, dated June 7, 1996)

The protestant also claims relief for several items alleged to be modifications. In regard to these claims, we note that in its application of the vessel repair statute, Customs has held that modifications to the hull and fittings of a vessel are not subject to vessel repair duties. Over the course of years, the identification of modification processes has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a modification which is not subject to duty, the following elements may be considered.

1. Whether there is a permanent incorporation into the hull or superstructure of a vessel (see United States v. Admiral Oriental Line et al., T.D. 44359 (1930)), either in a structural sense or as demonstrated by the means of attachment so as to be indicative of the intent to be permanently incorporated. This element should not be given undue weight in view of the fact that vessel components must be welded or otherwise "permanently attached" to the ship as a result of constant pitching and rolling. In addition, some items, the cost of which is clearly dutiable, interact with other vessel components resulting in the need, possibly for that purpose alone, for a fixed and stable juxtaposition of vessel parts. It follows that a "permanent attachment" takes place that does not necessarily involve a modification to the hull and fittings.

2. Whether in all likelihood, an item under consideration would remain aboard a vessel during an extended lay up.

3. Whether, if not a first time installation, an item under consideration replaces a current part, fitting or structure which is not in good working order.

4. Whether an item under consideration provides an improvement or enhancement in operation or efficiency of the vessel.

Very often when considering whether an addition to the hull and fittings took place for the purpose of 19 U.S.C. ? 1466, we have considered the question from the standpoint of whether the work involved the purchase of "equipment" for the vessel. It is not possible to compile a complete list of items that might be aboard a ship that constitute its "equipment". An unavoidable problem in that regard stems from the fact that vessels differ as to their services. What is required equipment on a large passenger vessel might not be required on a fish processing vessel or offshore rig.

"Dutiable equipment" has been defined to include:

...portable articles necessary or appropriate for the navigation, operation, or maintenance of a vessel, but not permanently incorporated in or permanently attached to its hull or propelling machinery, and not constituting consumable supplies. Admiral Oriental, supra., (quoting T.D. 34150, (1914))

By defining what articles are considered to be equipment, the Court attempted to formulate criteria to distinguish non-dutiable items which are part of the hull and fittings of a vessel from dutiable equipment, as defined above. These items might be considered to include:

...those appliances which are permanently attached to the vessel, and which would remain on board were the vessel to be laid up for a long period... Admiral Oriental, supra., (quoting 27 Op. Atty. Gen. 228).

A more contemporary working definition might be that which is used under certain circumstances by the Coast Guard; it includes a system, accessory, component or appurtenance of a vessel. This would include navigational, radio, safety and, ordinarily, propulsion machinery.

Upon reviewing the documentation submitted with respect to the proposed modifications, we are in accord with such claims with the exception of Item Nos. 8F.Mod1 and 38F.H-7 on page 15 of the worksheet and the attendant survey referenced in Item No. 4 on page 1 of the worksheet. The work covered by this documentation was done because of fractures found in the face plates. Accordingly, this constitutes dutiable repairs rather than a nondutiable modification.

Item No. 8 covers parts which the vendor's invoice specifies are for six Sea-Land vessels. The SEA-LAND VOYAGER is not among the six listed on the invoice. Additional attachments to the invoice reference a seventh Sea-Land vessel, but again not the SEA-LAND VOYAGER. Accordingly, the aforementioned documentation fails to substantiate the protestant's claim for relief under this item pursuant to T.D. 75-257 and therefore these parts are dutiable.

In regard to the pro rata tax alleged to be nondutiable in Item Nos. 11.a, 11.b, 11.c and 11.d, there is no basis for such a finding. Counsel cites to Headquarters ruling 113294, dated January 3, 1995, for the proposition that any costs which are not connected with foreign shipyard repair operations and are part of the normal costs of supplying and operating a vessel are not dutiable. A pro rata tax on dutiable foreign parts does not fall within the duty-free costs addressed in that ruling. Furthermore, Customs has long-held that foreign government taxes (e.g., goods and services taxes (GST) which this pro rata tax is characterized as on the invoices) to be dutiable under the vessel repair statute. (T.D. 55005(3) and Headquarters ruling 110425, dated November 30, 1989) Accordingly, the pro rata tax included under these items is dutiable. In regard to remainder of the costs indicated as "Free" on the worksheets, we are in accord with the protestant's nondutiable claims.

HOLDING:

Following a thorough review of the evidence submitted as well as an analysis of the law and applicable precedents, we have determined that for the reasons stated in the Law and Analysis portion of this ruling, the protest under consideration 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, this decision should be mailed by your office 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 the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel via the Customs Ruling Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

Jerry Laderberg
Acting Chief
Entry and Carrier Rulings Branch

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