Vessel Repair; Modification; Application; Segregation of Costs; Inspection; Testing; Anchor Chains; Propeller; Overhead; Survey; Scavenger Air Spaces; 19 U.S.C. 1466; M/V PRESIDENT MONROE; V-85; Entry No. C27-0061064-8.

HQ 112454 March 31, 1993 VES-13-18 CO:R:IT:C 112454 GFM CATEGORY: Carriers Chief, Technical Branch Commercial Operations Pacific Region 1 World Trade Center Long Beach, CA 90831 RE: Vessel Repair; Modification; Application; Segregation of Costs; Inspection; Testing; Anchor Chains; Propeller; Overhead; Survey; Scavenger Air Spaces; 19 U.S.C. 1466; M/V PRESIDENT MONROE; V-85; Entry No. C27-0061064-8. Dear Sir: This letter is in response to your memorandum dated September 9, 1992, which forwards for our review the application for relief filed in conjunction with the above-referenced vessel repair entry. FACTS: The vessel PRESIDENT MONROE arrived at the port of Los Angeles, California, on December 10, 1991, and filed a timely vessel repair entry. The entry indicates that the vessel underwent foreign shipyard work at Kaohsiung, Taiwan, Kobe, Japan and Yokohama, Japan during November of 1991. This application seeks relief from duty for various inspection, cleaning, repair, and modification charges incurred during vessel's dockage at said foreign shipyards. ISSUE: Whether the cost of foreign shipyard work completed aboard the subject vessel is dutiable pursuant to 19 U.S.C. 1466. LAW AND ANALYSIS: Title 19, United States Code, section 1466(a), provides in pertinent part, for payment of duty in the amount of 50 percent ad valorem on the cost of foreign repairs to vessels documented under the laws of the United States to engage in the foreign or coastwise trade, or vessels intended to be employed in such trade. ITEM 509 BOW THRUSTER SURVEY.....................$ 5,662.00 ITEM 509.1 BOW THRUSTER REPAIRS....................$ 850.00 ITEM 509.2 BOW THRUSTER TUNNEL ANODES..............$ 1,794.00 ITEM 509.3 BOW THRUSTER TUNNEL BAR REMOVAL.........$ 1,450.00 These items represent charges for repairs made to the bow thrusters. Item 509 contains charges for "opening and closing the hatch for inspection, refilling of oil, and renewing shaft seal." Item 509.1 contains charges for "grit blasting and coating (sic), and painting" of the bow thruster. Item 509.2 contains charges for "renew[ing] anodes on bow thruster tunnel." Item 509.3 contains charges for "remov[ing] bow thruster tunnel bars from tunnel entrances, grind[ing] surfaces, welding, and building-up corroded areas by welding." It is clear from the descriptions contained in the shipyard invoice that these bow thruster operations are associated with dutiable repairs. With regard to Item 509.3, the applicant claims that this item constitutes a modification as it is a mere removal which will enhance the vessel's operation. We disagree. The item includes charges for the testing of a repair as well as repairs of areas not associated with the tunnel bars. With regard to Item 509.2, the replacement of zinc anodes, it is also well settled that such operations constitute dutiable repairs pursuant to Bureau Letter DB 212.6 (July 23, 1958) and Headquarters Ruling Letters 103327, 111883, 112128, and 112180. Consequently, as the above items clearly constitute dutiable transactions, we must assume, absent evidence to the contrary, that the grit blasting in Item 509.1 and the inspections undertaken in Item 509 were integral parts of the repairs undertaken and in accordance with long-standing authority they must be considered dutiable as well. ITEM 514 PAD EYE INSTALLATION......................$ 68,925.00 This item involves the installation of lashing pad eyes. The invoice indicates that the existing lashing padeyes were modified and reinforced. Petitioner alleges that this operation constitutes a modification in that the vessel's operating efficiency was enhanced and the need for maintenance was reduced. It is the position of the Customs Service that neither modifications, alterations, or additions to the hull and fittings of a vessel are 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 layup. 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. We have held that the removal of an existing, operational system for the purpose of improving the efficient performance of the vessel is not dutiable provided that the work was not performed in conjunction with dutiable repairs. Customs Ruling 108871. Even if an article is considered to be part of the hull and fittings of a vessel, the repair of that article, or the replacement of a worn part of the hull and fittings, is subject to vessel repair duties. With regard to this item, we are satisfied that it constitutes a modification. Accordingly, the cost of this item ($ 68,925.00) is non-dutiable. ITEM 515 HATCH COVERS..............................$ 35,000.00 This item involves charges for "providing labor, material and shore-crane to (sic) shifting all hatch covers ashore (or on the bottom of the dock) and replace upon completion of the inspection." Applicant seeks to have these items considered non- dutiable on the basis that they constitute transportation costs. According to C.I.E. 1325/58, charges for transportation of parts and materials between a vessel and a workshop are not dutiable if itemized separately. Moreover, it is the position of the Customs Service that "transportation" does not include operations relative to preparing the item for shipping. Thus, labor for such services as removing a part from its housing or mounting, or disconnecting an item, etc., does not constitute transportation and are thus dutiable. See Headquarters Ruling Letter 112211, dated June 30, 1992. With respect to the case at hand, the invoice contains consolidated transportation charges and includes charges for services which may not be included in transportation costs. Accordingly, the entire cost of the item ($ 35,000.00) is dutiable. ITEM 515.1 HATCH COAMING Sub-item (a) Repairs...........................$ 60,215.00 Sub-item (b) Staging...........................$ 2,000.00 Sub-item (c) Modifications.....................$ 19,900.00 This item consists of three separate elements: Repairs, staging, and modifications. Sub-item (a) contains charges for repair operations coupled with charges for "administrative overhead" which is assessed as an hourly charge by the shipyard intended to cover general expenses involved in maintaining the shipyard facility during the repair operations. Applicant acknowledges that the repairs in sub-item (a) are dutiable, but claims that the administrative overhead charges are non-dutiable. Customs has had occasion to consider the dutiability of so- called "overhead" charges (see Customs Ruling 111170, February 21, 1991). In that ruling, we cited a published Treasury Decision of long standing wherein it was determined that: Taxes paid on emoluments received by third parties for services rendered...and premiums paid on workmen's compensation insurance, are not charges or fees within the contemplation of the decision of the Customs Court, International Navigation Company v. United States, 38 USCR 5, CD 1836, and are therefore subject to duty as components of the cost of repairs under [section 1466]. "Emoluments" as used in the cited decision would include all wages, taxes, accounting fees, office space charges, inventory or mark-up costs, purchasing costs, and management fees. Accordingly, the general and unspecified "overhead" charges associated with this item, as well as with all the items contained in this invoice, are considered dutiable. As a result, the cost of sub-item (a) ($ 60,215.00) is fully dutiable. Sub-item (b) contains charges for "furnish[ing] labor, equipment (sic) and materials to modified (sic) the transverse box girder inside stifference" and "erect[ing] [and removing] staging." As the repair costs in this sub-item have not been segregated from the staging costs, the entire cost of the sub- item ($ 2,000.00) is dutiable. Sub-item (c) contains charges for operations which applicant contends should be considered non-dutiable modifications. After evaluation of the shipyard invoice and technical drawings, we are convinced that these operations were modifications. Accordingly, the cost of this sub-item ($ 19,900.00) is non-dutiable. ITEM 515.2 HATCH COVERS Sub-item (a) Repairs...........................$ 42,600.00 Sub-item (b) Bearing Pad Modification..........$ 200,160.00 Sub-item (c) Hatch Cover Top Repairs...........$ 9,540.00 Sub-item (d) Staging...........................$ 600.00 This item involves various operations performed relative to the vessel's hatch covers. Sub-item (a) also contains charges for repair operations coupled with charges for "administrative overhead" which is assessed as an hourly charge by the shipyard intended to cover general expenses involved in maintaining the shipyard facility during the repair operations. Again, applicant acknowledges that the repairs in sub-item (a) are dutiable, but claims that the administrative overhead charges are non-dutiable. Pursuant to previously cited authority, the overhead charges associated with this item are fully dutiable. Thus, the entire cost of the sub-item ($ 42,600.00) is dutiable. Sub-item (b) contains charges for operations which applicant contends should be considered non-dutiable modifications. After evaluation of the shipyard invoice and technical drawings, we are convinced that these operations were modifications. Accordingly, the cost of this sub-item ($ 19,900.00) is non-dutiable. Sub-item (c) also contains charges for repair operations coupled with charges for "administrative overhead" which is assessed as an hourly charge by the shipyard intended to cover general expenses involved in maintaining the shipyard facility during the repair operations. Again, applicant acknowledges that the repairs in sub-item (c) are dutiable, but claims that the administrative overhead charges are non-dutiable. Pursuant to previously cited authority, the overhead charges associated with this sub-item are fully dutiable. Thus, the entire cost of the item ($ 9,540.00) is dutiable. Sub-item (d) contains segregated staging costs and is non- dutiable. ITEM 516 TAILSHAFT SURVEY Sub-item (a) Staging...........................$ 950.00 Sub-item (b) Inspection........................$ 10,883.00 Sub-item (c) Repairs...........................$ 6,780.00 This item involves operations performed pursuant to repairs and inspection of the tailshaft. Sub-item (a) contains segregated staging costs and is non- dutiable. Sub-items (b) and (c) contain charges related to preparing for an inspection of the vessel's tailshaft. Applicant asserts that the charges included in this item should be classified as non-dutiable incidents to a required inspection. Customs Service Decision 79-277 stated, "[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 and subsequent rulings citing it, have been utilized by vessel owners seeking relief not only from charges appearing on an ABS or 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, insurance carrier is not dutiable even when dutiable repairs are effected as a result of the 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 are necessary. Although the invoice indicates 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 American Bureau of Shipping (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 labelled "continuous" or "ongoing" is dutiable. Moreover, we note that C.S.D. 79-277 does not exempt from duty the cost of maintenance or repair work done by a shipyard in preparation of a required survey. Nor does it exempt from duty the cost of any testing by the shipyard to check the effectiveness of repairs completed previous to, or found to be necessary by reason of, the required survey. The exact nature of the item in question and the circumstances surrounding it are unclear from the evidence submitted. It is clear from the invoice, however, that at least some repairs to the propeller and stern tube did occur. In light of this, it is not clear whether the inspection was accomplished to ascertain the effectiveness of repairs or whether the repairs were a result of the inspection. In any event, in accordance with C.S.D. 79-277, we hold these items to be dutiable incidents to repair absent credible evidence to the contrary. Accordingly, the cost of the item ($ 17,663.00) is dutiable. ITEM 519.1 LONGITUDINAL STRUCTURE FR 59-61.........$ 39,300.00 ITEM 521 RELOCATE AFT HOSE MACHINERY...............$ 18,562.00 ITEM 522 STORE & HOSE CRANE HYDRAULICS.............$ 24,900.00 ITEM 530 BOW THRUSTER PIPING.......................$ 6,773.00 In a supplemental explanatory letter dated April 2, 1992, the applicant stated that item 519.1 involved the "crop[ping] back and renew[ing] the basic longitudinal structure." Applicant further stated that this operation was necessitated by a "design defect" which, coupled with "lack of exact fit, (lack of) good welding, and (lack of) structural continuity" had led, over the years, to "numerous fractures and repairs at the details of welded connections." Items 521, 522, and 530 involved equipment changes and repairs alleged to constitute modifications. In C.I.E. 410/52, the Customs Service considered the issue of design defects. In that case, a casualty occurrence led to an ABS survey which required the vessel to undertake "slotting and strapping of T-2 type tankers" in order to satisfy inspection requirements. Relying on a letter from the American Bureau of Shipping mandating the repairs, the Customs Service held that, under such circumstances, any resulting work would be considered non-dutiable modifications. With regard to these items, the attached American Bureau of Shipping documentation contains no mention of either the FR 59- 61 BHD structures, the aft crane hose machinery, or the stores and hose crane hydraulic fitting. Accordingly, the work detailed in the invoice cannot be considered non-dutiable modifications and must be held dutiable unless and until evidence is presented which clearly shows that such work was the result of a design defect and that the operations undertaken were required by the inspecting authority. ITEM 520 FUEL OIL TANK CLEANING....................$ 44,500.00 This item contains charges related to the cleaning of the fuel oil tank pursuant to fuel oil tank inspections. As it has long been recognized that general cleaning that is not an integral part of repairs is not dutiable. See, Traders Steamship v. United States, C.D. 1827 (Customs Ct., 1946). ITEM 525 BALLAST TANK INSPECTIONS..................$ 11,859.00 This item involves charges for inspections and surveys of the ballast tank and associated repair operations. Upon examining the invoice entry for this item, the exact nature of the circumstances surrounding it is unclear according to the evidence submitted. It is clear from the invoice, however, that at least some repairs to the ballast tanks did occur. In light of this, it is not clear whether the inspection was accomplished to ascertain the effectiveness of repairs or whether the repairs were a result of the inspection. In any event, in accordance with C.S.D. 79-277, we hold these items to be dutiable incidents to repair absent credible evidence to the contrary. Accordingly, the cost of the item ($ 11,859.00) is dutiable. ITEM 531 ANCHOR CHAIN & CHAIN LOCKER Sub-item (a) Range Chains......................$ 5,418.00 Sub-item (b) Chain Repairs.....................$ 3,260.00 Sub-item (c) Chain Locker......................$ 3,090.00 This item involves operations undertaken pursuant to anchor chain repairs and inspections. It is well settled that cleaning operations which remove rust and deterioration or worn parts, and which are a necessary factor in the effective restoration