 HQ 111884 |
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March 25, 1992
VES-13-18 CO:R:IT:C 111884 JBW
CATEGORY: Carriers
Chief, Technical Branch Commercial Operations Pacific Region 1 World Trade Center Long Beach, CA 90831
RE: Vessel Repair; Modification; Repair; Segregation of Costs; Inspection; Warranty; Scavenger Air Spaces; 19 U.S.C. 1466; M/V PRESIDENT POLK; Entry No. C27-0054168-6.
Dear Sir:
This letter is in response to your memorandum dated August 21, 1991, which forwards for our review the application for relief filed in conjunction with the above-referenced vessel repair entry.
FACTS:
The vessel PRESIDENT POLK arrived at the port of San Pedro, California, on May 25, 1991, and filed a timely vessel repair entry. The entry indicates the vessel had foreign shipyard work while in Japan, Taiwan, , and Hong Kong. The entry also indicates that during the course of its foreign voyage, the vessel called in Singapore where it underwent extensive repair and modification procedures. We are requested to consider the dutiable character of numerous items and to address the general of whether a cost category listed as "overhead" and represented as a flat percentage of each enumerated shipyard operation may be considered as non-dutiable.
ISSUES:
(1) Whether work claimed to have been performed pursuant to warranty is subject to duty in this case.
(2) Whether certain work performed to the vessel in Jurong Shipyard resulted in modifications to the vessel and is therefore not subject to duty under 19 U.S.C. 1466.
(3) Whether the underwater survey is a non-dutiable inspection under 19 U.S.C. 1466.
(4) Whether certain foreign shipyard procedures and costs, including overhead charges, are considered subject to duty.
(5) Whether removing carbon and oil deposits from diesel engine air scavenger spaces constitutes a nondutiable cleaning or a dutiable maintenance operation under 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.
In the case of Sea-Land Service, Inc. v. United States, 683 F. Supp. 1404 (CIT 1988), the court addressed whether repair work performed on a newly constructed vessel subsequent to its delivery to the owner might be considered to be part of the new construction contract. Simply put, the court considered whether "completion of construction" is a viable concept so as to render the duty provisions of 19 U.S.C. 1466(a) inapplicable if proven.
The court found completion of new construction to be a valid concept, subject to specific conditions, which are:
1. "All work done and equipment added [must be] pursuant to the original specifications of the contract for the construction of the vessel ...."
2. "This basic standard is limited to work and equipment provided within a reasonable period of time after delivery of the vessel."
The contract for construction of the vessel under consideration in that case contained clauses guaranteeing for twelve (12) months any area of the vessel for which the builder accepted responsibility under the contract and specifications, conditioned upon written notification from the owner of any covered defect within the agreed upon 12-month period.
In reviewing the warranty case on remand from the court, Customs had the opportunity to review the contract, the specifications, and a so-called "guarantee notebook." This document consisted of numerous guarantee items, some generic in nature and some specific, and represented the written notification of defects from the owner to the builder as required by the contract. In that case, we found that the court-ordered criteria had been satisfied and that the "reasonable period of time" for the warranty period was the one-year period specified in the contract. We have since held likewise in similar cases, and have adopted the one-year limit as the bench mark for honoring new construction warranties which otherwise qualify.
In the present case, the applicant seeks relief for claimed warranty work performed on the #1 and #2 Hatch Longitudinal Coaming Terminations (Jurong Invoice Item 3.3-14). These operations were performed between April 25, 1991, and May 1, 1991. In a letter dated December 21, 1990, American President Lines stated to Customs that the PRESIDENT POLK was delivered on July 17, 1988. Notwithstanding this statement, the first notation in the record that the vessel was experiencing problems in this area was on November 22, 1989. Letter from American Presidents Line to Bremer Vulkan AG, dated November 22, 1989.
These dates exceed the one-year limit described above.
Moreover, the applicant submits no acknowledgement by the vessel builder that such repairs actually fell within the scope of the warranty. Absent such evidence, the applicant's warranty claims are denied.
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, various elements may be considered. In all cases, modification costs must be fully segregated from other charges, since mixed repair/modification charges are assessed duty.
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.
After reviewing the evidence regarding the specific items submitted for our consideration, we find the following:
Jurong Shipyard Item 3.3-2: Shell Plate and Internal Stiffeners Frames 296 to 308:
Stiffeners were installed to correct a design defect in the C-10 class vessels. The invoice shows no repairs were made to this ship in these areas. The cost of this item is not subject to duty.
Jurong Shipyard Item 3.3-10: Hatch Cover and Coamings:
This invoice item shows that modifications were made to the hatch covers of the vessel. The invoice, subsection (h), shows that repairs were made to correct cracks in the hatch covers and provides a separate cost for these repairs. The repairs made under subsection (h) are therefore subject to duty. Likewise, costs appearing under subsection (a), which relate to removal and inspection of the hatch covers, are subject to duty. Otherwise, the work performed under this invoice item represents a new design feature and is considered a modification. The cost of this other work is not subject to duty.
Jurong Shipyard Item 3.3-14: #1 and #2 Hatch Longitudinal Coaming Terminations:
We denied earlier in this letter the applicant's claim that this item was performed pursuant to warranty. The invoice indicates that repairs to correct fractures were made as part of the claimed modification. Because these costs were not segregated, the entire cost of the item is subject to duty.
Jurong Shipyard Item 3.3-19: Removal of Bow Thruster Bars:
This item involved the removal of the strainer bars on the port and starboard side shell. No repairs were made. The item represents an alteration in the design of the vessel that may be characterized as an improvement. The cost of this item is not subject to duty.
Jurong Shipyard Item 3.3-20: Bottom Longitudinals at Major Frames 3, 6, and 9:
The invoice indicates that repairs were made as part of the claimed modification. Because these costs are not segregated, the entire cost of the item is subject to duty.
Jurong Shipyard Item 3.7-6: Engine Room Exhaust Fan Outlet Louvers:
The invoice shows that engine room louvers were installed. The record shows that the louvers were a new design feature and did not replace previously installed items. This work constitutes a modification that is not subject to duty.
Jurong Shipyard Item 5.7-12: Anchor Bottom Plate:
The work under this item was performed to correct sea exposure of the anchors and anchor stowage. This work constitutes a new design feature that is not repair related. The costs are therefore not subject to duty.
Jurong Shipyard Item 5.3-8: Main Engine L.T. Cooling Isolation Valve:
The invoice shows that an isolation valve was installed. This valve did not replace an existing part and represents a new design feature. This work constitutes a modification that is not subject to duty.
Jurong Shipyard Item 5.7-1: Main Engine Air Cooler Water Line:
The invoice indicates that main engine air cooler pipes were removed and reconfigured. This work constitutes an improvement to the vessel and is not subject to duty.
The Jurong Shipyard invoice indicates that an underwater survey was performed. The Customs Service has held that where a test is performed to ascertain the extent of damage sustained or whether repairs are deemed necessary, then the costs are dutiable as part of the repairs that are accomplished. C.I.E. 429/61; C.S.D. 79-2, 13 Cust. B. & Dec. 993 (1979); C.S.D. 79-277, 13 Cust. B. & Dec. 1395, 1396 (1979). However, Customs has held that inspections not resulting in repairs are not dutiable.
Headquarters Ruling Letter 110395, dated September 7, 1989; see American Viking Corp. v. United States, 37 Cust. Ct. 237, 247, C.D. 1830 (1956). The invoice description relating to the survey in question indicates that no repairs were made. The costs are therefore not subject to duty.
The applicant also seeks relief for the replacement of sea valve plugs (Jurong Invoice Item 3.3-21). The applicant claims that these plugs were replaced to meet United States Coast Guard and American Bureau of Shipping requirements for five year dry docking surveys. The Customs Service has held that where periodic surveys are undertaken to meet the specific requirements of a governmental entity, a classification society, or insurance carrier, the cost of the surveys is not dutiable even when dutiable repairs are effected as a result thereof. Headquarters Ruling Letter 110368, dated July 26, 1989. In a recent case, we emphasized that this interpretation exempts from duty only the cost of a required scheduled inspection by a qualifying entity.
Headquarters Ruling Letter 111328, dated August 7, 1991.
Further, this office has held that repairs made in preparation of a required survey are not exempt from duty. Id. The invoice description and the description provided in the record suggest that the plugs were replaced as part of an ongoing maintenance program in preparation for a survey. The cost of the plugs is subject to duty under 19 U.S.C. 1466.
The entry in question is accompanied by company-prepared work sheets which include a column marked as "Duty Free Overhead @ 8$ Per Man Hour" [sic]. It is reported that Customs will be receiving eight other entries which can be expected to include this cost category and we are asked to rule upon the dutiable status of such "overhead" charges.
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 (T.D. 55005(3), December 21, 1959), 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. Certainly, general and unspecified "overhead" charges such as are included in the entry under consideration are considered dutiable.
The applicant seeks relief for the cleaning of certain main engine air scavenger spaces. The scavenging spaces of a diesel engine are steel chambers that are permanently attached to the cylinders of the engine. The scavenging spaces serve two functions. First, the scavenging spaces receive the discharge from the turbo-chargers and deliver the charged air to each cylinder via reed valves and intake ports. Second, air from the piston underside is pumped into the scavenging space via reed valves to supplement turbo-charger-delivered air. This air enters the cylinders via inlet ports uncovered when the piston gets to the bottom end of its stroke and serves to "scavenge" the burnt gasses out of the cylinder. This process cleans the cylinders of spent energy and provides a clean air discharge for the next fuel injection. As a result of this process, some gasses containing unburnt carbon may be left and deposited in the scavenging spaces.
These carbon deposits and other oily deposits in the scavenger spaces may result in fire or explosion. They also reduce the efficient operation of the engine. Diesel engine maintenance manuals therefore require periodic cleaning of the scavenger spaces to permit the safe and efficient operation of the vessel. The maintenance of a scavenger space involves removing access plates and scraping, wire brushing, and wiping the inside of the space. This operation is labor intensive and would take a single worker up to two working days to clean a single cylinder.
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).
Most recently, 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 cost of cleaning the air scavenger spaces is 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 principal function of the air scavenger spaces is to either deliver turbo- charged air to the cylinders or receive spent gasses from the cylinders. The collection of carbon and other oily deposits poses a fire or explosion hazard and results in a diminished engine function. The removal of the carbon deposits through scraping, wire brushing, and wiping results in a restoration of the scavenger spaces to good condition following a decline in function of the scavenger spaces. 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.
HOLDING:
Following a thorough review of the evidence submitted as well as analysis of the applicable law and precedents, we have determined that the Application for Review should be allowed in part and denied in part as set forth in the Law and Analysis portion of this ruling.
Sincerely,
B. James Fritz Chief Carrier Rulings Branch