HQ 112965

December 23, 1993

VES-13-18-CO:R:IT:C 112965 GOB

CATEGORY: Carriers

Deputy Regional Director

Commercial Operations

Pacific Region

One World Trade Center

Long Beach, California 90831

RE: Vessel Repair; 19 U.S.C. 1466; Protest; M/V PRESIDENT POLK,

V- 29; Entry No. C27-0054168-6; Modification; Warranty; Overhead

Dear Sir:

This is in response to your memorandum dated November 17,

1993, which forwarded the protest submitted by American President

Lines, Ltd. (\"protestant\"), seeking reliquidation of the above-

referenced entry.

FACTS:

The vessel PRESIDENT POLK (the \"vessel\") arrived at the port

of San Pedro, California on May 25, 1991, and filed a vessel repair

entry. Foreign shipyard work was performed on the vessel while it

was in Japan, Taiwan, Hong Kong, and Singapore.

In a decision dated March 25, 1992, Customs granted in part

and denied in part the application for relief.

In a decision dated June 29, 1993, Customs granted in part and

denied in part the petition for relief.

Protestant\'s Claims

The protest pertains to the following items:

Item No. Description

All items Administrative Overhead

3.2-6 Cargo Hold Cleaning

3.2-5 Hatch Coaming

3.3-10 Hatch Covers and Coamings

3.3-11 Cargo Hold D&H Vent Modification

3.3-14 Hatch #1 and #2 Longitudinal Coaming

Terminations

3.3-20 Bottom Longitudinal at Fr 6 & 3

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The protestant states that non-productive administrative

overhead qualifies for remission of duty based on the statute,

regulations, prior rulings, and court cases. It cites Ruling

108953 dated January 7, 1988 and Ruling 109308 dated May 26, 1988.

The protestant has performed a \"billing rate analysis\", which

constructs a billing rate which includes the following three

elements: direct labor cost, overhead, and margin and profit.

The protestant states that the cargo hold cleaning is confined

to the cargo tank tops and is not related to any other work in or

about the cargo holds. It asserts that the cargo hold D&H vent

modification is a nondutiable modification.

The protestant claims that the builder of the vessel has

accepted the following items as warranty items and has made payment

to it for the correction of the contract deficiency: hatch coaming;

hatch covers and coamings; Hatch #1 and #2 longitudinal coamings

terminations; and bottom longitudinal at frames 6 and 3.

ISSUE:

Whether the subject items are dutiable pursuant to 19 U.S.C.

1466\.

LAW AND ANALYSIS:

19 U.S.C. 1466 provides for the payment of duty at a rate of

fifty 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 be employed in such

trade.

After a consideration of the evidence of record, we make the

following findings.

Overhead

As we stated in Ruling 112900 dated November 4, 1993 and

Ruling 112861 dated October 19, 1993, it is Customs position that

overhead relating to repair work is dutiable as part of the cost

of the repair, i.e., the total cost or expense of the repair is

dutiable. In contrast, overhead relating to a nondutiable item

such as a modification is nondutiable, i.e., the total cost or

expense of a nondutiable item is nondutiable. While Customs does

not wish to see overhead broken-out or segregated as a separate

item, our position on the dutiability of overhead, as stated supra,

holds whether or not overhead is a separate item.

In Ruling 112861, we stated as follows:

It is Customs position that overhead relating to repair work

is dutiable as part of the cost of the repair. Overhead is

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part of the shipyard\'s cost of doing business. The total

shipyard cost of each repair is dutiable; that total cost

includes overhead.

Customs does not wish to see overhead broken-out or segregated

as a separate item. Customs believes that overhead should be

included within the cost of the work performed, whether that

work be a dutiable repair or a nondutiable modification. As

stated supra, the total shipyard cost of each repair item is

dutiable; that cost includes overhead.

In support of its position that the overhead is nondutiable,

the petitioner has cited two previous rulings, Ruling 109308

dated May 26, 1988 and Ruling 108953 dated January 7, 1988.

In Ruling 112214 dated September 16, 1992, Customs stated as

follows with respect to the overhead issue:

Upon further review of this matter, we are of the opinion

that our interpretation of T.D. 55005(3) as set forth in

ruling 111170 and discussed above is correct.

Accordingly, rulings 108953 and 109308 are hereby

modified to hold that the costs of \"overhead\" and/or

\"administrative\" charges as described therein are

dutiable in their entirety in the absence of an

apportionment of such expense between dutiable and non-

dutiable work.

The two rulings cited by the petitioner, Ruling 109308 and

Ruling 108953, are not, and were not at the time they were

issued, accurately reflective of Customs position. These two

rulings were effectively overruled by Ruling 112214.

In the subject case, the petitioner\'s claim for relief on this

issue is granted with respect to any overhead charges which

are associated with nondutiable charges and which are clearly

reflected as such on the pertinent invoices. The petition is

denied with respect to all other overhead charges. \[End of

excerpt from ruling 112861.\]

Thus, as stated in Ruling 112861 and Ruling 112900, Ruling

108953 and Ruling 109308 were effectively overruled by Ruling

112214, which was not cited by the protestant.

Our position herein is consistent with numerous other rulings

issued in recent years, e.g., Ruling 111170 dated February 21, 1991

and subsequent rulings which cite Ruling 111170.

Accordingly, any overhead related to dutiable repairs is

dutiable. Any overhead related to nondutiable items is

nondutiable, provided that it is included in the cost or expense

of

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the nondutiable items or clearly reflected as related to such

nondutiable items on the pertinent invoices.

Other Items

We find that item 3.2-6, cargo hold cleaning, is dutiable

based upon the fact that the protestant has not established that

this cleaning is unrelated to repairs. As we pointed out in Ruling

112418, major repairs were effected to certain of the cargo holds.

We find that item 3.3-11, cargo hold d & h vent modification,

is nondutiable inasmuch as the record indicates this item was not

a repair.

With respect to the protestant\'s warranty claim, we find that:

item 3.3-20, bottom longitudinal at frames three and six, is

dutiable; and items 3.2-5 (hatch coaming), 3.3-10 (hatch covers and

coamings), and 3.3-14 (hatch one and two longitudinal coaming

terminations) are nondutiable. The latter three items are

nondutiable because the record indicates that: (a) the protestant

advised the ship builder, by letter dated February 10, 1989, of

\"very serious failures in a number of main hatch cover girders on

the C10 vessels\", including the subject vessel; (b) the vessel was

delivered on July 17, 1988; and (c) the ship builder reimbursed the

protestant for the cost of these repairs pursuant to the guarantee

or warranty clause of the contract. We find that there is a

sufficient nexus between these three items, 3.2-5, 3.3-10, and 3.3-

14, and the substance of the February 10, 1989 letter. However,

item 3.3-20 is dutiable because that repair is not included within

the scope of the February 10, 1989 letter.

Warranty items are nondutiable if the record clearly

establishes that: (a) the items are warranty items for new

construction; (b) the ship owner or operator has notified the ship

builder of the pertinent defects within one year of the delivery

of the vessel; and (c) the ship builder acknowledges that the items

are covered by the warranty and effects the repairs or reimburses

the vessel owner or operator for the repairs.

HOLDING:

As detailed above, the protest is granted in part and denied

in part.

The protest is granted with respect to item 3.3-11 (cargo hold

d & h vent modification), item 3.2-5 (hatch coaming), item 3.3-10

(hatch covers and coamings), item 3.3-14 (hatch one and two

longitudinal coaming terminations), and any overhead related to

nondutiable items, provided that such overhead is included in the

cost or expense of the nondutiable items or clearly reflected as

related to such nondutiable items on the pertinent invoices.

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The protest is denied with respect to item 3.2-6 (cargo hold

cleaning), item 3.3-20 (bottom longitudinal at frames three and

six), and any overhead which is not within the scope of the

preceding paragraph.

Sincerely,

Harvey B. Fox

Director, Office of