HQ H008155

April 16, 2008

VES-13-18-RR:BSTC:CCI H008155 CK

CATEGORY: Carriers

Supervisory Customs Entry Officer

U.S. Customs and Border Protection

1515 Poydras Street, 17^th^ Floor

New Orleans, Louisiana 70112

Re: 19 U.S.C. § 1466; Vessel Repair Entry C20-0058516-9; Protest No.
2002-

07-100018; AMERICAN CORMORANT; V-08/01

Dear Sir:

This is in response to your memorandum of March 8, 2007, forwarding for
our review the protest filed by counsel on behalf of Cormorant
Shipholding Corp. (CSC), with respect to Vessel Repair Entry
C20-0058516-9. Our ruling on this matter is set forth below.

**FACTS:**

The AMERICAN CORMORANT, a U.S.-flagged vessel owned by the protestant,
incurred foreign shipyard costs. On September 18, 2001, the vessel
arrived in the United States after operating outside of the United
States for over 9 1/2 years. A vessel repair entry was timely filed, and
an application for relief was filed on January 16, 2002. On April
October 6, 2006, a duty determination occurred in the amount of
\$5,231,610.88. On December 27, 2006, the protestant filed Protest No.
2002-07-100018.

**ISSUE:**

Whether the costs for which the protestant seeks relief are dutiable
under

19 U.S.C. § 1466?

**LAW AND ANALYSIS:**

Initially, we note that the information in the file indicates that the
protest, with application for further review, was timely filed under the
statutory and regulatory provisions for protests. 19 U.S.C. 1514(c)(3)
and 19 CFR 174.12(e).

Title 19, United States Code, section 1466(a) (19 U.S.C. 1466(a))
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 or repairs made in a foreign country upon a vessel
documented under the laws of the United States...."

Because the vessel was overseas for more than two years, work undertaken
after the first six months from the M/V AMERICAN CORMARANT's departure
from the U.S. is exempted from vessel repair duties by statute. See, 19
U.S.C. §1466(e). Thus, only repairs or expenses of repairs that took
place within the first six months from the date the vessel left the last
U.S. port on March 21, 1992 are dutiable.

In determining the dutiability of certain shipyard costs, two cases
decided since 1994 become integral to any discussion. The first is [SL
Service, Inc. v. United States]{.underline}, 357 F.3d 1358 (Fed. Cir.
2004), *rev'g* 244 F. Supp. 1359 (Ct. Int'l Trade 2002), *cert. denied*
December 13, 2004. In that case, the Court of Appeals for the Federal
Circuit upheld CBP's proration of certain shipyard 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' 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.

In [Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc.
v. United States]{.underline}, 44 F.3d 1539 (Fed. Cir. 1994), *aff'g*
815 F.Supp. 1484 (Ct. Int'l Trade 1993), the court stated in pertinent
part as follows with respect to the reach of section 1466:

> Texaco urges to reject the Court of International Trade's "but for"
> approach and to interpret "expenses of repairs" so as to exclude those
> expenses (e.g., expenses for clean-up and protective covering work)
> not incurred for work directly involved in the actual making of
> repairs. Such a reading has no basis in the plain language of the
> statute, however. Aside from the inapplicable statutory exceptions,
> the language "expenses of repairs" is broad and unqualified. As such,
> we interpret "expenses of repairs" as covering all expenses (not
> specifically exempted in the statute) which, but for dutiable repair
> work, would not have been incurred.

Protestant's first position is that neither court case cited above
should be applicable to the subject protest since the vessel had left
the U.S. years before the cases were decided.

However, the triggering date for the application of vessel repair law is
the date of entry. We have previously stated that all vessel entries
filed after December 29, 1994, the date of the CAFC decision's in
[Texaco]{.underline} are subject to the "but for" test articulated in
that case. [See]{.underline}, HQ 113350, dated March 3, 1995. In this
case the vessel at issue arrived and made entry on September 2001, and
thus is subject to the [Texaco]{.underline} "but for" test.

ITEM 33:

The invoice from Esgard Corrosion Coatings of Germany does not state
what services were performed or what the \$150,000.00 invoice covers.
Instead, the invoice simply states that the company has reached the 50%
completion point and seeks to have half the amount of the invoice
remitted. It appears that Esgard was paid \$70,000.00. The date of the
invoice is October 16, 1992. Protestant argues that the date of the
invoice is beyond the six-month dutiable period set out in 1466(e), and
in the alternative the work constitutes a non-dutiable modification. The
Vessel Repair Unit (VRU") found the modification argument to be without
merit based on the fact that the work performed is never set forth. The
VRU also argues that an invoice follows the performance of work so the
work must have been performed within the six-month dutiable period.

The invoice in this case is dutiable. The invoice does not set out the
dates of work performed. If the work was performed outside the six-month
dutiable period it was incumbent upon protestant to submit an invoice
setting out the dates of the work at issue.

ITEM 35:

A Matatec SGM Worldwide invoice dated September 30, 1992 for rental
equipment used by the riding gang in repair work. Protestant claims that
rental equipment costs are not dutiable per HQ 111170, dated February
21, 1991. The VRU recommends that relief be denied because the equipment
was used in performing dutiable repairs and therefore under the
[Texaco]{.underline} "but for" test the equipment would be dutiable. The
1991 case protestant cites pre-dates the controlling
[Texaco]{.underline} case. The rental equipment would not have been
necessary "but for" the dutiable repairs performed that required that
equipment. The item is dutiable.

ITEM 36:

A Matatec SGM Worldwide invoice dated September 30, 1992 for workman
hours and transportation. Protestant concedes dutiability of the work
hours, but claims that a pre-[Texaco]{.underline} ruling would allow
relief. However, the [Texaco]{.underline} case is controlling and in
applying its "but for" test, the workman hours and transportation
wouldn't have been incurred but for the dutiable work. The item is all
dutiable.

ITEM 38:

A Siept Van Brethorst invoice for pipe, dated October 9, 1992.
Protestant states that the invoice was included by mistake as it was
outside the six-month period. The VRU states that based on an accounts
payable ledger page the "accounting period" was "6/92" and therefore the
invoice was for pipe delivered during the six-month period. A review of
many accounts payable ledger pages submitted with the protest shows the
VRU was correct in their assumption that the dates the costs were
incurred are correctly reflected during the "account period" on the
accounts payable ledger page. For example, one invoice dated July 3,
1992 was for services performed between April and May 1992. The accounts
payable ledger page dated July 3, 1992 is for the accounting period
"4/92." Therefore, based on the evidence supplied showing how protestant
uses its "account period", unless the protestant has an invoice showing
the service dates conclusively outside the six-month dutiable period,
the item remains dutiable.

ITEM 41:

This item consists of a one page submission that appears to be a
breakdown of costs prepared by protestant. This breakdown is based on
Exhibit F to the application for relief dated January 16, 2001. Exhibit
F is a final invoice from Blohm + Voss Ag dated August 12, 1992. There
are four lines on the invoice: General Expenses, Steel Repairs, Voyage
Repairs, and Change Orders No. 1 to No. 234. Total invoice minus a
credit note is \$10,000,000.00. This invoice is the final bill for all
the costs in the overhaul that the M/V AMERICAN CORMORANT underwent at
the drydocking performed at Blohm + Voss between September 1, 1992 and
November 16, 1992. The drydocking overhaul of the M/V AMERICAN CORMORANT
was performed over 66 days.

Protestant has made a variety of arguments regarding how the costs
should be prorated over the length of the drydocking because only those
costs incurred within 6-months of the vessel leaving the United States,
which in this case is September 21, 1992, may be dutiable. The
protestant has submitted various pieces of reports and costs, made
numerous calculations, and passed on snippets of information. The only
independent pieces of information supplied by the protestant are the
first pages of the first three weekly status work reports from the
shipyard. The first report, dated September 11, 1992 states that work
began on September 7, 1992, and by the date of the report 13% of the
contracted work had been performed. Report no. two, dated September 18,
1992 states that 22% of the contract work had been completed. Finally,
the third report dated September 25, 1992 states that 32% of the
contracted work had been completed.

In spite of repeated requests by the VRU, protestant has claimed that no
other invoices or details of the work performed, or breakdown of costs
for the work performed by Blohm + Voss other than the four line invoice
cited above and various non-related pages of work progress reports, also
cited above exist. Thus, we can only determine what work was performed
within the 6-month dutiable period based on the evidence presented.
Therefore, we must conclude that 32% of the work that is the basis of
the \$10,000.000.00 invoice was completed within the dutiable 6-month
period, thus \$3,200,000.00 of the invoice costs were performed or
incurred during the 6-month dutiable period. As no other claims for
remission under 19 U.S.C. 1466 were made, the entire \$3,200,000.00 is
dutiable

ITEM 5:

An invoice from W. Molyneux dated April 19, 1992, for professional
services for attending a joint re-delivery survey on the vessel and the
preparation and delivery of the survey report. The survey was apparently
performed at the end of the charter between the vessel's owner and the
Military Sealift Command (MSC). The VRU found the survey dutiable
because it was not performed as a required government survey or for a
classification society or insurance carrier. (See C.S.D. 79-277) The
survey at issue, performed by a private company, to satisfy a contract
requirement does not meet the terms of nondutiable surveys, as stated by
the VRU. This item is dutiable.

ITEM 7:

A Gellatly Shipping (US) Ltd. invoice dated July 3, 1992 for work
performed on behalf of the vessel between April 15, 1992 and May 6,
1992. The work listed consists of lifeboat repairs, miscellaneous
expenses for car costs, fax messages, photocopying, communications,
mobile phone, crew expenses, and sundries including photographs, sullage
removal, launch hires, waste disposal, hiring pontoons and gangways,
towing barges, lashing barges, crane and various charges. Also listed
are port charges, such as pilotage, tug charges, tonnage charges and
light money, water costs and loading fees. These are general expenses.
They were prorated by the VRU as per the holding in the [SL
Services]{.underline} case, which calls for proration of drydocking and
shipyard costs. Protestant disagrees with the proration. However, the
costs were correctly prorated and this item is not entitled to relief.

ITEM 8:

A Husbands invoice dated April 30, 1992. The attached money transfer and
cost work sheet indicates a total invoice amount of \$41,400.00 or GBP
22,500.00. However, the three pages of the invoice detailing the work
totals only GBP 17,048.00. Relief was granted on all three pages of the
invoice setting out the work performed on the two lash barges.
Protestant states that a fourth page was submitted and the repairs were
duty free regardless of the fourth page because they were performed on a
lash barge and were nondutiable per 19 U.S.C. §1466(h)(2). The VRU
denied the request for relief based on the absence of the fourth page of
the invoice. We note that the bottom of the third page of the invoice
states "cont" indicating a fourth page, and that another copy of this
invoice with a fourth page was not submitted with the protest. Further
relief should not be granted.

ITEMS 10, 11, 12, 13, 14, 15, and 16:

These items were grouped together because protestant's argument is that
the costs at issue were all considered non-dutiable prior to the
[Texaco]{.underline} ruling and that the [Texaco]{.underline} ruling
should not be applied to this entry. However, we have already addressed
the issue that the vessel arrived and made entry after the
[Texaco]{.underline} case was issued by the court and is applicable to
this entry. The "but for" test applies to each item in this entry, and
since "but for" dutiable repairs the protested costs would not have been
incurred, the costs are dutiable, and no relief should be granted.

ITEM 24:

An invoice accounting for expenditures made by a ship's agent on behalf
of the vessel in Sweden dated August 14,1992. The expenditures cover
consumables and crew costs that are not dutiable such as diesel fuel,
salaries, and dentist services. Some costs are dutiable such as
batteries, film, and customs costs for dutiable parts and equipment.
Finally, the majority of items including piloting, mooring, tugboats,
and other expenses in arriving the vessel, plus transportation costs
were prorated as per the [SL Services]{.underline} case. Protestant once
again seeks relief on a pre-Texaco basis and on the court's holding in
[American Ship Management LLC v. United States,]{.underline} which was
reversed on appeal and has no applicability or authority. No relief
should be granted.

ITEM 25:

Various invoices and telex message dated March 3, 1992, regarding the
conversion of the Autotronica KM- 1 alarm system. The invoices cover the
purchase of cables and a printer. These items were correctly considered
dutiable equipment. The telex describes possibilities for the conversion
of the alarm system. The telex states in pertinent part, "In order to do
this work, the KM-1 units have to be dismantled and modified at the
backside of the units and alarm cables and printer have to be fitted.
This work can either be done onboard by one of our service engineers, or
the units can be sent to our factory for modification."

There are primarily four criteria for a claim of duty-free modification:

(1) whether there was a permanent incorporation into the hull or
    fittings;

(2) whether the item would item remain aboard during an extended lay-up;

(3) if not a first-time installation, whether an item that was not in
    good working order was replaced; and

(4) whether the item provided an improvement in operation or efficiency.

In this case the telex describing the options for converting the alarm
system states the system can be removed to the factory for the work or
can be performed onboard. Since the system can be removed, then the item
does not pass the first threshold criteria that the item be permanently
incorporated into the hull or fittings. The work and items at issue are
dutiable as they do not qualify as modifications.

ITEMS 29 AND 30:

Invoices for various parts, but the only costs at issue are the freight
costs incurred. Protestant makes the argument that
pre-[Texaco]{.underline} freight costs were not dutiable. However, these
freight costs would not have been incurred "but for' the dutiable parts
ordered. Thus, as per the holding in [Texaco]{.underline} the freight
costs are dutiable.

**HOLDING:**

Following a thorough analysis of the facts as well as of the law and
applicable precedents, we have determined that the protest should be
denied.

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 reliquidation 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,]{.underline} by means of the Freedom of Information Act,
and other methods of public distribution.

Sincerely,

Glen E. Vereb

Chief

Cargo Security, Carriers, & Immigration Branch