**HQ H031319**

**September 26, 2008**

**VES-13-18-OT:RR:BSTC:CCI** H031319 JLB

**CATEGORY**: Carriers

Supervisory Import Specialist

Vessel Repair Unit

U.S. Customs and Border Protection

1515 Poydras Street, Suite 1700

New Orleans, Louisiana 70112

RE: Protest No. 2002-08-100152; Vessel Repair Entry No. NK7-0200095-2;
LIBERTY SUN: V-95; Proration; 19 U.S.C. § 1466

Dear Sir:

This letter is in response to your memorandum of June 13, 2008,
forwarding the above-referenced protest for further review. We have
reviewed the comments set forth by your office and by the protestant,
Liberty Maritime Corporation. Our decision follows.

**FACTS**

The subject protest involves foreign shipyard work undergone by the
U.S.-flag vessel LIBERTY SUN. The vessel is currently owned and operated
by Liberty Sun Corporation. On May 22, 2006, the vessel arrived in
Jiangyin, China for shipyard work and returned to the United States at
the port of Houston, Texas on July 14, 2006. A vessel repair entry was
timely filed. On May 9, 2008, your office issued a determination of duty
in the amount of \$375,922.56. A timely protest was filed for the duties
assessed.

**ISSUE**

Whether the foreign repairs performed on the vessel for which relief is
sought are dutiable under 19 U.S.C. § 1466?

**LAW AND ANALYSIS**

Pursuant to 19 U.S.C. § 1466(a), there must be a 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 engage in such
trades. In [SL Service, Inc. v. United States]{.underline}, 357 F.3d
1358 (Fed. Cir. 2004), rev'g 244 F.Supp. 2d 1359 (Ct. Int'l Trade 2002),
cert. denied December 13, 2004, the Court of Appeals for the Federal
Circuit upheld U.S. Customs and Border Protection's ("CBP") proration of
certain expenses. The court stated in pertinent part as follows:

> ...apportionment is consistent with section 1466(a) and the \"but
> for\" test. In the context of dual-purpose expenses, it is rational to
> impose the duty on only that portion of the expense that is fairly
> attributable to the dutiable repairs. Indeed, to impose the 50% ad
> valorem duty on the entire costs of dry-docking in this case would
> exceed the mandate of the statute. The logical appeal of apportionment
> has been recognized in other areas of the law...Customs' \[now CBP\]
> long-standing practice of apportioning the cost of various expenses
> between dutiable repairs and non-dutiable inspections and
> modifications comports with both the statute and common sense.

[See,]{.underline} [e.g.]{.underline}, Headquarters Ruling Letter
113474, dated October 24, 1995; Headquarters Ruling Letter 112045, dated
March 10, 1992. The general services in this particular case are
described as "riggers, pilots, tugs, launch, diver, gangway, wharfage
and line handlers, to guide the ship into drydock, and tie up at pier."
[See]{.underline} Chengxi Shipyard invoice at item 1. The Vessel Repair
Unit ("VRU") held all these general services dutiable on a prorated
basis because they are "dual purpose expenses." Protestant disagrees
with the proration. An examination of the invoice indicates that the
general service costs were incurred in conjunction with both dutiable
and non-dutiable work performed while the vessel was in its scheduled
dry dock. Thus, the costs at issue should be prorated.

**Item 120: Ballast Tank Inspection**

This item is part of the Chengxi Shipyard invoice. The costs consist of
the first four line items, which are "Manhole opened/closed for TST
No.1-5#," "Bottom plug opened/closed," "Provide cherry picker service,"
and "Ultrasonic thickness measurement." [See]{.underline} Chengxi
Shipyard invoice at item 120. The protestant concedes that the VRU
correctly held all the line items dutiable since the ABS report was not
included in the Application for Relief but asserts that since the report
has now been included with the protest both the cost of the ABS
inspection and the shipyard costs associated with the inspection should
be non-dutiable. We note that those seeking a non-dutiable determination
regarding ABS surveys must submit both the invoice and the corresponding
report. [See]{.underline} Headquarters Ruling Letter 112202, dated May
20, 1992; Headquarters Ruling Letter 110710, dated July 13, 1990.
Accordingly, we concur with the VRU recommendation that the actual cost
of the inspection be held non-dutiable as the ABS report has now been
provided.

The VRU recommends that the shipyard costs associated with the ABS
inspection be held dutiable on a prorated basis though because they
relate to both dutiable repairs as well as the non-dutiable inspection.
We note that dutiable repairs were performed on the top side ballast
tanks ("TST"). Item 610, the cost of "TST/DBT manhole cover stud/cover
renewal," has been conceded to be a dutiable repair by Liberty Maritime
Corporation. [See]{.underline} [id.]{.underline} at item 610.
Additionally, the top side ballast tanks were "locally descaled at this
time and hard coatings partly restored" by request of the owner's
representative. [See]{.underline} ABS Class Survey Report at 141. The
shipyard work necessary for such restoration, which the protestant also
conceded was dutiable, consisted of "Rusted area chipped, cleaned and
washed with fresh water and applied 3 coats of paint." [See]{.underline}
Chengxi Shipyard invoice at item 802.4. In order to complete either of
these dutiable repairs, it is necessary for the manhole to be opened and
closed, the bottom plugs to be opened and closed, and the cherry picker
service. Accordingly, these three line items should be prorated as "dual
purpose expenses."

As for the final line item, the ultrasonic thickness measurement, the
ABS report indicates that these measurements were performed for the
Special Periodical Survey Hull. [See]{.underline} ABS Class Survey
Report at 225. Consequently, this shipyard cost is non-dutiable as it
was required by the periodic survey.

**Item 422: Crane Testing**

This item is listed on the Chengxi Shipyard invoice and is separated
into six line item costs. The first two line items indicate that the
"store's crane" and "E/R crane" equipment were load tested only "in the
presence of the Owner's representative." [See]{.underline} Chengxi
Shipyard invoice at item 422. It is specifically mentioned, however,
that for the other four items the testing was performed for "ABS
Recertification" and was conducted in the presence of both "the Owner's
Representative and ABS surveyor." [See]{.underline} [id.]{.underline}
The VRU recommends that the two tests performed merely for the owner's
representative, without the presence of the ABS surveyor, remain fully
dutiable but that relief be granted on the four remaining items.

CBP has held that inspections not resulting in repairs are not dutiable.
[See,]{.underline} [e.g.]{.underline}, [American Viking Corp. v. United
States]{.underline}, 37 Cust. Ct. 237, 247, C.D. 1830 (1956);
Headquarters Ruling Letter 112222, dated May 27, 1992; Headquarters
Ruling Letter 112128, dated June 29, 1992. 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; Headquarters Ruling Letter 112444, dated May 22,
1996; Headquarters Ruling Letter 114034, dated October 16, 1998;
Headquarters Ruling Letter 112378, dated November 30, 1992. 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. 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. 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).

The simple fact that a classification society is involved in a survey
does not, in and of itself, render all inspection costs non-dutiable. We
note that we have held that a required and periodic survey by a
classification society or government agency is non-dutiable if the costs
of the survey are separately itemized. [See]{.underline} Headquarters
Ruling Letter 113161, dated July 20, 1994. Vessel owners have
increasingly been seeking relief not only from charges on the ABS
invoice (the actual cost of inspection) but also for inspection-related
charges appearing on the shipyard invoice. The cost of a periodic survey
though is only non-dutiable if paid to a classification society or
insurance carrier to meet the specific requirements of a survey. If the
cost was instead paid to the shipyard, then the inspection costs are
dutiable. [See]{.underline} Headquarters Ruling Letter 112146, dated
June 4, 1992; Headquarters Ruling Letter 112045, dated March 10, 1992;
Headquarters Ruling Letter 112128, dated June 29, 1992;
[see]{.underline} [also]{.underline} C.S.D. 79-277 (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 is exempt from duty).
Accordingly, the crane tests performed merely for the owner's
representative (the first two line items) are dutiable. The four
remaining line items, where the ABS representative was present, are held
to be non-dutiable.

**HOLDING**

After a thorough review of the record, the protest is denied in part and
granted in part as detailed above.

In accordance with the Protest/Petition Processing Handbook (CIS HB,
January 2002, pp. 18 and 21), you are to mail this decision, together
with the Customs Form 19, to the protestant no later than 60 days from
the date of this letter. Any recalculation of duties of the entry in
accordance with the decision must be accomplished prior to mailing of
the decision. Sixty days from the date of the decision the Office of
Regulations and Rulings will make the decision available to CBP
personnel, and to the public on the CBP Home Page on the World Wide Web
at www.cbp.gov, by means of the Freedom of Information Act, and other
methods of public distribution.

Sincerely,

Glen E. Vereb, Chief

Cargo Security, Carriers and Immigration Branch