HQ 226485

February 5, 1996

VES-13-08-RR:IT:EC 226485 GEV

CATEGORY: Carriers

Chief, Liquidation Section

U.S. Customs Service

Post Office Box 2450

San Francisco, California 94111

RE: Protest No. 2704-95-102456; Vessel Repair Entry No. C27-0054146-2;

PRESIDENT KENNEDY; V-28; Protective Covering; Cleaning;

Staging; Transportation; Modifications;

Administrative Costs; 19 U.S.C. § 1466

Dear Sir:

This is in response to your memorandum dated September 25,

1995, forwarding the above-referenced protest with supporting

documentation for our review. Our ruling is set forth below.

FACTS:

The PRESIDENT KENNEDY is a U.S.-flag vessel owned and

operated by American President Lines, Inc. (APL). The vessel

incurred costs for foreign repair work during March of 1991.

Subsequent to the completion of this work the vessel arrived in

the United States at San Pedro, California on April 14, 1991. A

vessel repair entry was timely filed on April 16, 1991.

A timely filed application for relief was granted in part

and denied in part pursuant to Headquarters Ruling 111829, dated

December 17, 1991. A timely filed petition for review of the

aforementioned ruling was granted in part and denied in part

pursuant to Headquarters Ruling 112124, dated March 14, 1995.

The subject entry was liquidated on June 2, 1995. A protest

requesting further review, dated August 7, 1995, was timely filed

requesting relief for the following work appearing on Jurong

Shipyard Limited invoice no. 16441, dated June 3, 1991:

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Item No. 1-23 - Protective Floor Covering

Item No. 3.1-3 - Staging

Item No. 3.3-11 - Staging

Item No. 3.6-9 - E.R. Exh. Louvers

Item No. 3.6-9 - E.R. Exh. Staging

Item No. 3.6-21 - Staging

Item No. 999-6 - B.T. Void Space - Clean

Item No. 3.6-7 - Cleaning in Funnel

Item No. 5.3-1 - Stack Extensions

Item No. 5.6-13 - P/S LT/HT Cooler

Item No. 5.4-10 - Transportation

Item No. 5.4-13 - Transportation

Item No. 5.6-29 - Staging

Item No. 5.6-29 - Transportation

All Administrative Charges appearing throughout the

invoice.

Attached to the CF 19 and referenced therein is a letter

from the protestant, dated July 31, 1995, detailing the claims

for relief and enclosing the following: (A) a copy of

Headquarters Ruling 112124, and (B) C-10 General Arrangement -

Drawing HDW 230-0290-0202.

ISSUE:

Whether evidence is presented sufficient to allow the

protest regarding the dutiability of certain foreign costs under

19 U.S.C. § 1466.

LAW AND ANALYSIS:

Title 19, United States Code, § 1466 (19 U.S.C. § 1466),

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 of repairs made in a foreign country

upon a vessel documented under the laws of the United

States\...\"

Item No. 1-23 covers protective floor covering which, the

protestant states, was located in accommodation spaces only. The

protestant states that this covering was not located in any

repair areas nor were any repairs performed in the accommodation

spaces. Furthermore, it is contended that the reason for this

covering was not for a repair, but rather to protect the

accommodation spaces from heavy traffic by inspectors, surveyors

and service representatives visiting the vessel during the yard

availability. Consequently, the protestant states that the

decision of the court in Texaco Marine Services, Inc., and Texaco

Refining and Marketing, Inc. v. United States, 44 F.3d. 1539 is

not applicable and the item should therefore be free of duty.

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In Texaco Marine Services, Inc., and Texaco Refining and

Marketing, Inc. v. United States, 815 F.Supp. 1484 (1993), the

issue before the U.S. Court of International Trade (CIT) was

whether costs for post-repair cleaning and protective coverings

incurred pursuant to dutiable repairs constituted \"expenses of

repairs\" as that term is used in 19 U.S.C. § 1466. In holding

that the costs at issue were dutiable as \"expenses of repairs\"

the court adopted the \"but for\" test proffered by Customs; that

is, these costs were an integral part of the dutiable repair

process and would not have been necessary \"but for\" the dutiable

repairs.

On appeal, the CAFC issued a watershed decision which not

only affirmed the opinion of the CIT regarding the specific

expenses at issue, but also provided clear guidance with respect

to the interpretation of 19 U.S.C. § 1466, hence, Customs

administration of that statute. In upholding the \"but for\" test

adopted by the CIT, the CAFC stated:

\"\...the language expenses of repairs\' is broad and

unqualified.

As such, we interpret expenses of repairs\' as covering

all

expenses (not specifically excepted in the statute)

which,

but for dutiable repair work, would not have been

incurred.

Conversely, expenses of repairs\' does not cover

expenses

that would have been incurred even without the

occurrence

of dutiable repair work. As will be more clearly

illustrated

below\...the but for\' interpretation accords with what

is

commonly understood to be an expense of repair.\"

44 F.3d 1539, 1544.

In reaching the above determination, the CAFC steadfastly

rejected the non-binding judicial authority relied upon by the

plaintiff/appellant. Specifically, the court addressed the

following: Mount Washington Tanker Co. v. United States, 505

F.Supp. 209 (CIT 1980) which held that transportation

compensation for members of a foreign repair crew performing

dutiable repairs was not dutiable as an expense of repairs;

American Viking Corp. v. United States, 150 F.Supp. 746 (Cust.Ct.

1956\) which held that the expense of providing lighting needed to

perform a dutiable repair was not dutiable as an expense of the

repair; and International Navigation Co. v. United States, 148

F.Supp. 448 (Cust.Ct. 1957) which held that transportation

expenses for a foreign repair crew to travel to and from an

anchored vessel being repaired was not dutiable as expenses of

repairs. With regard to these three cases, the CAFC stated,

\"Seemingly, these expenses too would have been viewed as coming

within the \[vessel repair\] statute if the court had used a \"but

for\" approach.\" 44 F.3d 1539, 1547. The CAFC concluded, \"Thus

Mount Washington Tanker, like American Viking and International

Navigation, was incorrectly decided.\" Id.

In addition to the above judicial authority, the CAFC

discussed at length the case of United States v. George Hall Coal

Co., 142 F. 1039 (1939), heavily relied upon by the plaintiff/

appellant, which held dry-docking expenses were not an expense of

repair and therefore were not dutiable. Although this decision

seemingly supported the position that the expenses at issue were

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dutiable, the CAFC examined the rationale provided in a December

31, 1903, unpublished decision of the Department of Treasury

Board of General Appraisers (Board) upon which the court\'s

decision was based. It noted that, \"\...the Board held the dry-docking
expense was not subject to the vessel repair duty because

the Board found that the expense would have been incurred

irrespective of whether or not dutiable repairs were performed.\"

44 F.3d 1539, 1546 The CAFC went on to state, \"George Hall Coal

simply stands for the proposition that expenses that would have

been incurred irrespective of whether or not dutiable repairs are

performed are not dutiable as an expense of repairs.\" Id. It

therefore concluded, \"\...George Hall Coal is entirely consistent

with the but for\' interpretation of the statute.\" Id.

Recognizing that the decision of the CAFC was not only

dispositive of the expenses at issue, but also instructive as to

Customs administration of the vessel repair statute with respect

to the interpretation of the term \"expenses of repairs\" contained

therein, the Assistant Commissioner, Office of Regulations and

Rulings, issued a memorandum to the Regional Director, Commercial

Operations, New Orleans (file no. 113308) dated January 18, 1995,

published in the Customs Bulletin on February 8, 1995 (Customs

Bulletin and Decisions, vol. 29, no. 6, at p. 59) In that

memorandum, copies of which were disseminated to two other

Customs field offices charged with the liquidation of vessel

repair entries, it was stated that pursuant to the

decision of the CAFC, a myriad of foreign repair expenses

previously accorded duty-free treatment would, under certain

circumstances, no longer receive such treatment. The memorandum

further provided that any such affected costs contained in vessel

repair entries not finally liquidated as of the date of the CAFC

decision (December 29, 1994) should be liquidated as dutiable

\"expenses of repairs\" provided they pass the \"but for\" test

discussed above.

Subsequent to the publication of the above memorandum, on

February 22, 1995, various representatives of U.S.-flag vessel

owners/operators, including the protestant, met with the

Assistant Commissioner, Office of Regulations and Rulings. It

was the collective opinion of the vessel owners/operators that

the memorandum be rescinded, contending, inter alia, that it was

violative of 19 U.S.C. § 1625(c)(1) and 19 CFR Part 177. Upon

further review of this matter, the Assistant Commissioner, Office

of Regulations and Rulings, again issued a memorandum to the

Regional Director, Commercial Operations Division, New Orleans

(file no. 113350), dated March 3, 1995, published in the Customs

Bulletin on April 5, 1995 (see Customs Bulletin and Decisions,

vol. 29, no. 14, at p. 24) clarifying the January 18 memorandum

with respect to Customs implementation of the CAFC decision. It

provided that all vessel repair entries filed with Customs on or

after the date of that decision are to be liquidated in

accordance with the full weight and effect of the decision (i.e.,

costs of post-repair cleaning and protective coverings incurred

pursuant to dutiable repairs are dutiable and all other foreign

expenses contained within such entries are subject to the \"but

for\" test). With respect to vessel repair entries filed prior to

December 29, 1994 (such as the one currently the subject of this

protest), all costs for post-repair cleaning and protective

coverings incurred pursuant to dutiable repairs are dutiable.

It further provided that in view of the fact that carriers have

relied on Customs rulings (some of which were based on court

cases which the CAFC in Texaco held were incorrectly decided),

and retroactive application would cause both the Government and

the carriers a major administrative burden,

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Customs will not apply Texaco retroactively except as to the two

issues directly decided by the court. All other costs contained

within such entries are to be accorded that treatment previously

accorded them by Customs prior to the decision of the CAFC in the

Texaco case.

Parenthetically, we note that the CAFC decision was

published in its entirety in the Customs Bulletin on March 8,

1995 (See Customs Bulletin and Decisions, vol. 29, no. 10, at p.

19).

In regard to Item No. 1-23, the shipyard invoice provides as

follows:

\"PROTECTIVE FLOOR COVERING\"

\"Covered the accommodation alleyways and designated

cabins,

messrooms and offices with polythene sheet and hard

plywood

during the repair period.\" (Emphasis added)

Assuming arguendo, as the protestant suggests, that no

repair work was actually done to above-referenced alleyways,

cabins, messrooms and offices, the shipyard invoice nonetheless

provides irrefutable evidence that the cost of the protective

covering in question was incurred pursuant to dutiable repairs

performed on the vessel. Accordingly, the decision of the court

in Texaco is applicable to the subject protest and Item No. 1-23

is therefore dutiable.

Item Nos. 3.1-3, 3.3-11, 3.6-9, 3.6-21 and 5.6-29 all cover

costs for staging. The protestant states that staging costs,

when identified and priced separately, are non-dutiable. While

that statement is correct pursuant to Headquarters Rulings 105172

and 106713 for all pre-Texaco entries such as the one which is

the subject of this protest, we note that the shipyard invoice

upon which the subject staging costs are listed does not provide

for the cost segregation to which the protestant refers. Rather,

the staging covered by each of the aforementioned items, although

described separately from some of the repair work listed

thereunder, nonetheless is included with other dutiable work in

one charged amount. Specifically, the cost for staging set forth

in Item 3.1-3 also covers the tightening of anodes and the

filling of bolt holes with cement, the costs for staging set

forth in Items 3.3-11, 3.6-9 and 3.6-21 include the cost of

painting, and the cost of staging in Item 5.6-29 includes the

cost of repairing the cargo hold exhaust fan rotor (i.e.,

stripping off the winding, rewinding, varnishing, and renewing

bearings). Pursuant to C.I.E.s 1325/58 and 565/55, relief may

not be granted where the invoice does not show a breakdown of

what is dutiable and what is not. Accordingly, the staging

referenced in Item Nos. 3.1-3, 3.3-11, 3.6-9, 3.6-21 and 5.6-29

is dutiable.

Item 3.6-9 covers work entitled, \"ENGINE ROOM EXHAUST FAN

OUTLET.\" The shipyard invoice contains the following description

with respect to this work: \"Fabricated, cropped, fitted and

welded louvers vent on the port side aft. of the funnel house.\"

With respect to this item the protestant states that Headquarters

ruling 112124 granted it duty-free status but it was made

dutiable at the time of liquidation. We note that the petition

referred to this item as a

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\"class item warranty modification.\" (See p. 3 of the petition

letter dated January 17, 1992) It was therefore reviewed in

light of the criteria for both a warranty item and a modification

and denied as to the former but granted as to the latter. (See

Headquarters ruling 112124, p. 5). Notwith-standing this

determination, the work was liquidated as dutiable. This

discrepancy therefore merits further review of this item.

With respect to warranty claims, Customs has in the past

had occasion to consider the validity of warranty agreements, and

has found that the cost of repairs performed pursuant to claimed

warranty work is subject to vessel repair duty (see published

Customs Service Decision (C.S.D. 81-50)). Consequently, the

warranty claim for Item 3.6-9 was denied.

In regard to modification claims, Customs has held that

modifications to the hull and fittings of a vessel are not

subject to vessel repair duties. 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, the following elements may be considered.

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 lay up.

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.

Very often when considering whether an addition to the hull

and fittings took place for the purpose of 19 U.S.C. § 1466, we

have considered the question from the standpoint of whether the

work involved the purchase of \"equipment\" for the vessel. It is

not possible to compile a

complete list of items that might be aboard a ship that

constitute its \"equipment\". An unavoidable problem in that

regard stems from the fact that vessels differ as to their

services. What is required equipment on a large passenger vessel

might not be required on a fish processing vessel or offshore

rig.

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\"Dutiable equipment\" has been defined to include:

\...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. Admiral Oriental,

supra., (quoting T.D. 34150, (1914))

By defining what articles are considered to be equipment,

the Court attempted to formulate criteria to distinguish non-dutiable
items which are part of the hull and fittings of a

vessel from dutiable equipment, as defined above. These items

might be considered to include:

\...those appliances which are permanently

attached to the vessel, and which would

remain on board were the vessel to be laid

up for a long period\... Admiral Oriental,

supra., (quoting 27 Op. Atty. Gen. 228).

A more contemporary working definition 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.

In regard to the modification claim for Item 3.6-9, upon

reviewing the shipyard invoice it is readily apparent that all of

the four criteria for a modification enumerated above have been

met (the method of installation (i.e., welding) is indicative of

permanent attachment, it would remain aboard the vessel during an

extended lay up, it enhances the operation of the vessel, and the

work is a new item as opposed to one that is replacing an

existing defect). Accordingly, Item 3.6-9 meets the criteria

for a modification and is therefore not dutiable.

Item 5.3-1 is entitled \"SSDG EXHAUST PIPE EXTENSIONS\". The

shipyard invoice contains the following description with respect

to this work: \"The exhaust pipe from the 3 generators were \[sic\]

modified by welding extensions to the existing as per

specifications.\" An additional charge appearing under this item

is as follows: \"500 dia. X 2.5 mm x 9mmt x 1 length for boiler

pipe extension.\" With respect to this item, the protestant

states that Headquarters Ruling 112124 granted it duty-free

status but it was made dutiable at the time of liquidation. We

note that the petition referred to this item as a \"Class warranty

item.\" (See p. 4 of the petition letter dated January 17, 1992)

It went on to state that \"\[t\]he SSDG exhaust pipes and boiler

pipe were extended to correct an original design

deficiency\...\[i\]t is therefore, an improvement.\" Id.

Consequently, this item was reviewed in light of the criteria for

both a warranty item and a

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modification and denied as to the former but granted as to the

latter. (See Headquarters ruling 112124, pp. 5-6)

Notwithstanding this determination, the work was liquidated as

dutiable. This discrepancy therefore merits further review of

this item.

As stated above, with respect to warranty claims Customs

has in the past had occasion to consider the validity of warranty

agreements, and has found that the cost of repairs performed

pursuant to claimed warranty work is subject to vessel repair

duty (see published Customs Service Decision (C.S.D. 81-50)).

Consequently, the warranty claim for Item 5.3-1 was denied.

In regard to the modification claim for Item 5.3-1, upon

reviewing the shipyard invoice, it is readily apparent that all

of the four enumerated criteria have been met (the method of

installation (i.e., welding) is indicative of permanent

attachment, the extensions would remain on board during an

extended lay up, the work is not replacing a current part of the

vessel not in good working order but is merely extending it, and

it provides an enhancement in operation of the vessel).

Accordingly, Item 5.3-1 meets the criteria for a modification and

is therefore non-dutiable.

Item 999-6 is entitled, \"BOW THRUSTER VOID SPACE CLEANING\"

and covered the removal of \"\...all the lub. oil, dirt and sand at

bow thruster space.\" The protestant states that the subject

cleaning \"\...was not cleaning for a repair, nor was it cleaning

after a repair.\" Notwithstanding the inapplicability of the

Texaco decision to the subject protest except for post- repair

cleaning and protective coverings as discussed above, Customs

long-standing position with respect to cleaning is that the

charges for such services are dutiable if the cleaning 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, and T.D.s 45001

and 49531). In that regard we note that Item 3.1-7 of the

shipyard invoice, entitled \"BOW THRUSTER SEALS AND ANODES\",

specifies that the bow thruster was subjected to \"maintenance

works.\" Maintenance is dutiable under the vessel repair statute

(see Headquarters rulings 111917). Accordingly, since the

cleaning covered by Item 999-6 was performed in conjunction with

dutiable work it is dutiable.

Item 3.6-7 is entitled, \"Cleaning in Funnel.\" This cleaning

was accomplished with a chemical detergent and removed soot,

carbon and stains from \"the areas of the main engine exhaust

smoke stack generators and boilers, various vent pipes, decks,

platform and access ladder approx 2500mm.\" (Emphasis added)

Item 3.6-8 on the shipyard invoice is entitled \"MAIN ENGINE

EXHAUST STACK MODIFY AND RENEWAL\" and covered repair work to the

main engine exhaust smoke stack. Consequently, the cleaning in

Item 3.6-7 was held dutiable as being done in conjunction with

the repairs performed in Item 3.6-7. The protestant contends

that the cleaning done in Item 3.6-7 \"is not only poorly

described, it is inaccurately described.\" Specifically, the

protestant states that Item 3.6-8 has no relation to Item 3.6-7

since the \"stack\" referenced in the former is not the area that

was cleaned in the latter. Aside from this bald claim, the

protestant has submitted only a drawing (Enclosure B) depicting

the area of the vessel to

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which he is referring. The record is devoid of any documentation

from the shipyard corroborating the protestant\'s contention that

the shipyard invoice is inaccurate. Accordingly, in the absence

of such evidence, Item 3.6-7 is dutiable.

Item 5.6-13 is entitled, \"P/S LT/HT F.W. Cooler Cleaning.\"

With respect to this item, the protestant states the following:

\"The misunderstanding here occurs from item 5.6-14.

Item 5.6-14

does not exist. It was canceled and there is no cost

against item

5.6-14. Without item 5.6-14, item 5.6-13 becomes a

straightforward

cleaning item for inspection. There were no repairs

performed.\"

The record does not support this claim. The invoice contains no

information regarding the cancellation of Item 5.6-14 (which

covers dutiable repairs related to the cleaning covered by Item

5.6-13). Furthermore, the protestant has submitted no

documentation from the shipyard to that effect. Accordingly, in

the absence of such evidence Item 5.6-13 is dutiable.

Items 5.4-10, 5.4-13 and 5.6-29 include charges for

transportation. The protestant states that transportation costs,

when identified and priced separately, are non-dutiable. While

that statement is correct pursuant to C.I.E.s 204/60, 937/60,

1325/58 and C.D. 1836 for all pre-Texaco entries such as the one

which is the subject of this protest, we note that the shipyard

invoice upon which the subject transportation costs are listed

does not provide for the cost segregation to which the protestant

refers. Rather, the transportation covered by each of the

aforementioned items, although described separately from some of

the repair work listed thereunder, nonetheless is included with

other dutiable work in one charged amount. Specifically, the

costs for transportation set forth in Items 5.4-10 and 5.4-13

also cover overhauling the stator and renewing the bearings, and

the cost for transportation set forth in Item 5.6-29 includes the

cost of work done to the motor cover. Pursuant to C.I.E.s

1325/58 and 565/55, relief may not be granted where the invoice

does not show a breakdown of what is dutiable and what is not.

Accordingly, the transportation referenced in Item Nos. 5.4-10,

5.4-13 and 5.6-29 is dutiable.

Finally, the protestant cites Treasury Decision (T.D.) 39443

in support of its position that the cost of administrative

overhead is not dutiable. That decision, among others, has been

thoroughly discredited by the opinion of the U.S. Court of

Appeals for the Federal Circuit in Texaco. Customs has

determined that the decision rendered in Texaco, supra, will only

be applied from the decision date forward for all issues other

than repair-related cleaning and protective coverings. (See

Headquarters memorandum 113350, dated March 3, 1995, published in

the Customs Bulletin of April 5, 1995) Therefore, the protest

should be allowed in this case for administrative overhead

charges. (See Headquarters rulings 113085 and 113540) These

same types of charges will be held dutiable for all entries filed

on or after December 29, 1994.

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HOLDING:

Following a thorough review of the evidence submitted as

well as an analysis of the law and applicable precedents, we have

determined that for the reasons stated in the Law and Analysis

portion of this ruling, the protest under consideration must be

granted in part and denied in part.

In accordance with § 3A(11)(b) of Customs Directive 099

3550-065, dated August 4, 1993, Subject: Revised Protest

Directive, this decision should be mailed by your office no later

than 60 days from the date of this letter. Any reliquidation of

the entry in accordance with this

decision must be accomplished prior to mailing the decision.

Sixty days from the date of the

decision the Office of Regulations and Rulings will take steps to

make the decision available to customs personnel via the Customs

Ruling Module in ACS and the public via the Diskette Subscription

Service, Freedom of Information Act and other public access

channels.

Sincerely,

Director

International Trade Compliance

Division