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HQ 112146
June 4, 1992
VES-13-18-CO:R:IT:C 112146 MLR
CATEGORY: Carriers
Deputy Assistant Regional Commissioner Commercial Operations 423 Canal Street New Orleans, Louisiana 70130-2341
RE: Vessel Repair; 19 U.S.C. 1466; Vessel Repair Entry No.

C53-0012156-9; Invoice Summarization; Equipment; Petition for Review; S/S COASTAL EAGLE POINT V-5
Dear Sir:

This is in response to your memorandum of March 9, 1992, regarding the petition for review of HQ 111325, submitted by Sharon Steele Doyle, Givens & Kelly, on behalf of Coscol Marine Corp.


FACTS:

The record reflects that the subject vessel, the S/S COASTAL EAGLE POINT, arrived at the port of Houston, Texas, on June 2, 1990. Vessel repair entry, number C53-0012156-9, was filed timely indicating work performed on the vessel in England.

An application for relief (HQ 111325) was filed on August 31, 1990, after an extension was granted. That decision held all items in the A & P Appledore (Falmouth) Ltd. Repair Account Invoice no. 769/471 (hereinafter A & P) dutiable because the item descriptions did not adequately detail the costs.

The installation of a Skanti/Sait communications unit was dutiable equipment because no evidence was presented to show that the unit would permanently remain on board. Also, in the Mackay communications work orders it appeared as if some of the costs for certain items were missing. Further, mileage was held to be dutiable absent an explanation why freight was also included.

HQ 111325 also addressed two receipts from Lloyds Bank for "masters cash"; it was unclear if the charge was related to a repair.

The Vessel Repair Liquidation Unit granted an extension until October 11, 1991, to file a petition for review. During the course of a meeting at Customs Headquarters on September 5, 1991, the Carrier Rulings Branch granted an extension until December 11, 1991. The record reflects that apparently another extension was granted until January 31, 1992. A petition for review was filed January 31, 1992.

We are asked to review:

I. A revised invoice from A & P which segregates the cost items;
II. all items on the A & P invoice pertaining to periodic inspections and the cleaning for period inspections;
III. whether a Skanti/Sait communications unit is dutiable equipment, or a permanently installed addition; and
IV. two Lloyds Bank receipts for "masters cash".


ISSUE:

Whether the foreign work performed on the subject vessel for which the petitioner seeks review is dutiable under 19 U.S.C.

1466.


LAW AND ANALYSIS:

Title 19, United States Code, section 1466, 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 foreign or coastwise trade, or vessels intended to engage in such trade.


I. A & P Revised Invoice
We are reluctant to accept an entirely new A & P invoice.

It appears that the original invoice was done on a computer (since the invoice seems to have been printed by a dot matrix printer) and the replacement invoice appears to have been typewritten. We will accept the replacement invoice, but we would be interested to know how long the shipyard stores its computer invoice files.

Also, we note that the cost items, originally placed together at the end of the entire item description, are now only separated and placed after a relevant line description. Some items, the dutiability of which are not in dispute, have only been reshuffled. For example, Item 52 had two paragraphs of description with five line item costs following the description (i.e., material, cranage, transport, cleaning, and repairs). Now the replacement invoice contains the same two paragraphs of description with the line items "material", and "labour for repairs" following the description. Following these two line items is a heading entitled "Additional Services provided" with "cranage", "transport", and "cleaning" underneath. In actuality, a transport and cleaning cost should have been placed after the first paragraph which described the transport and the cleaning of the fan and motor in question.

It would have been more helpful if a cost was listed for each line description, allowing Customs to determine its dutiability, rather than lumping the costs together and categorizing it for Customs.


II. A & P Invoice Periodic Inspections and Cleaning for Period Inspections
Certain vessel inspection operations are generally considered non-dutiable. Where periodic surveys are undertaken to meet the specific requirements of, for example, a classification society or insurance carrier, the cost of the surveys is not dutiable even when dutiable repairs are effected as a result thereof. C.S.D. 79-277. With increasing frequency, this ruling has been utilized by vessel owners seeking relief not only from charges appearing on an A.B.S. 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.

C.S.D. 79-277 discussed the dutiability of certain charges incurred while the vessel underwent biennial U.S. Coast Guard and A.B.S. 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 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.

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 A.B.S. 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 American Bureau of Shipping). 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 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.

Turning to the case before us, the petitioner contends that certain costs listed on the A & P invoice as "periodic inspection" and "cleaning for periodic inspection" are non- dutiable.

Item 16 - Sea Chest/Strainers. In the original invoice the work pertaining to this item was described with the costs for this item listed beneath and categorized to reflect Customs duty (i.e., periodic inspection, cleaning for periodic inspection, staging, materials, repairs). The replacement invoice now shows the same description and costs, but the costs are placed after a description of work:

Removed mud deposits washed, cleaned and pumped out bow thrust compartments.

Periodic inspection........................2900.00 Cleaning for periodic inspection...........2100.00
While this may reflect more accurately how the costs were incurred, the fact remains that repair operations described later (i.e., painting) still were conducted. By the fact that the area was painted, the cleaning done beforehand was clearly in preparation of, and an integral part of the repairs. Obviously, the area must be clean to allow inspection, but it also must be clean to be painted. Examination, inspections and cleaning which involve no dutiable elements, to include repair or maintenance, are the only instances in which they are not dutiable. C.D.

1830 (emphasis added).

Further, the petitioner claims that the cost of "periodic inspection" is non-dutiable. This cost was paid to the shipyard, not to the A.B.S. or Coast Guard. We emphasize that only inspection costs paid to a classification society or insurance carrier to meet the specific requirements of a survey are non- dutiable. Therefore, the "periodic inspection" and "cleaning for periodic inspections" costs are dutiable.

Item 17 - Sea Valves. This item now shows a "periodic inspection" cost in the amount of $6233, and a "cleaning for periodic inspection" cost in the amount of $1540 listed after the relevant operations conducted: "Opened up cleaned, overhauled nominated sea valves, presented for examination by USCG Inspector and A.B.S. Surveyor and closed up on completion using Owners jointings, packings, etc." Again, only a periodic inspection cost paid to a classification society for a required survey is non-dutiable; therefore, this cost is dutiable. Also, because the description shows that the sea valves were "overhauled", the cleaning was performed in preparation of this repair. Had the petitioner showed a cost only for "opening" the sea valves, this cost would have been non-dutiable.

Item 18 - Rudder Assembly. The costs for "cleaning for periodic inspection" and "periodic inspection" are dutiable for the same reasons as item 17 above. The description under "additional work" of this item shows that repairs were conducted.

Item 19 - Tailshaft Survey. Both costs are dutiable. The A.B.S. Report states that repairs were performed to the tailshaft.

Item 20 - Propeller Polishing. Both costs are dutiable.

Cleaning operations which remove rust and deterioration or worn parts, and which are a necessary factor in the effective restoration of a vessel to its former state of preservation, constitute vessel repairs. C.I.E. 429/61. Customs has long held the cost of 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; see C.I.E.'s 18/48, 125/48, 910/59, 820/60, 51/61, 429/61; 569/62, 698/62; C.D. 2514; T.D.'s 45001 and 49531.

Pursuant to C.I.E. 919/60 remission of duty assessed on the cost or repairs is not warranted under section 1466 where the repairs are maintenance in nature.

In T.D. 43322 which discussed the dutiability of maintenance painting, the court stated:

It is a matter of common knowledge that the words "maintain" and "maintenance" are frequently used in the sense of keeping a thing in good condition by means of "repairs". For example, to maintain a highway, ordinarily, means to keep it in a proper state of repair. Obviously, "maintenance," whether used in connection with a ship or other thing, means to keep or preserve in a good condition. This may, and frequently does, involve the making of repairs.

Accordingly, we find that propeller polishing goes beyond mere cleaning operations, and constitutes dutiable maintenance.

Item 22 - Anchors. Both costs are dutiable. The invoice shows that the anchors were coated and that repairs were conducted. The A.B.S. Report states that the chain locker and anchor chain cables were badly worn and renewed and that three badly worn links were cropped out.

Item 26 - Port and Stbd Boiler Handhole Plates/Drum Manholes. Both costs are dutiable (126 hand hole joints were renewed).

Item 27 - Boiler Main Stop Valves. Both costs are dutiable (machined out existing seat, and shrunk fitted owners new 6" dia seat).

Item 43 - Throttle Valve. Both costs are dutiable (carried out repairs to M.E. ahead throttle valve as directed by owners representatives). Further, the A.B.S. Report credits the survey of this item towards the special continuous survey of machinery and electrical equipment, indicating that the inspection of this item was not solely conducted to satisfy the requirements of the A.B.S., but was convenient for the vessel operators to check the effectiveness of the repairs.

Item 54 - Air Ejector. Both costs are dutiable (repairs were conducted upon the pumps and then inspected).


III. Skanti/Sait Communications Unit
HQ 111325 denied relief for the cost of the installation of a Skanti/Sait communications unit, stating:

...in the absence of evidence that it would remain on board the subject vessel were the subject vessel laid up for an extended period of time, the communications equipment in question is considered to be vessel equipment and, as such, the cost of its installation is dutiable.

The costs relating to the installation are item 108, A & P invoice; Sait invoice 403952; and Mackay Communications invoice.

Petitioner has submitted a letter {exhibit 4(g)(1)} from EB Communications which explains the costs on the Sait Marine Invoice, since we questioned why mileage and freight were both included. We accept this explanation and hold the following costs non-dutiable:

Travel Time to Site 768.00 Site Labour 432.00 Mileage and Bridge Toll 399.00 Forwarding or Parts 30.50
HQ 111325 stated that the Mackay Communications work orders were inconclusive regarding the cost of certain merchandise utilized in the installation. Now petitioner submits the bill showing that the amount paid to Mackay is the same amount appearing on the work order.

For purposes of section 1466, dutiable equipment has been defined as:

...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. United States v.

Admiral Oriental Line et al., T.D. 44359 (1930) {quoting T.D. 34150, (1914)}.

A more contemporary working definition of equipment 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.

To prove that the communications unit is a permanent addition to the vessel, the petitioner has submitted a letter from Mackay Communications {exhibit 17(1)} which states: "This radio equipment is a permanent part of the vessel and will not be removed in the event the ship is put in lay-up." The letter also states that the SKANTI TRP-8258 SSB Radiotelephone was installed to upgrade the vessel for compliance with the new Global Maritime Distress & Safety System. (Emphasis added).

In HQ 109936 we determined that a satellite communications system was a non-dutiable permanent addition to the fittings of the vessel. However, in that case, three letters from three different enterprises were presented to show that not only was the system designed for permanent installation and was left on board during lay-up, but specific examples of other vessels were cited to show that the system did, in fact, remain on board when they were in lay-up for an extended period of time. In light of the fact that we have consistently held that such delicate electronic equipment is dutiable, additional evidence, citing examples, would be useful. Therefore, we must deny petitioner's claim at this time.


IV. Lloyds Bank
HQ 111325 also considered two receipts from Lloyds Bank, questioning whether the amount for "masters cash" related to a repair. Petitioner has submitted the masters cash accounts {exhibits 4(q)(1) and 4(q)(2)} which show the receipt of the cash from the agent and its distribution to the crew. Accordingly, we hold the Lloyds Bank receipts non-dutiable.


HOLDING:

All costs listed on the A & P invoice as "periodic inspection" and "cleaning for periodic inspection" are dutiable.

The evidence to show that the communications unit would permanently remain on board is not sufficient. The evidence presented to show that masters cash is not related to any repairs is sufficient.

Sincerely,
B. James Fritz Chief Carrier Rulings Branch

 
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