HQ 112789: Vessel Repair; Inspection; Installation; Modification; Overhead; Segregation of Costs Vessel: ARCO JUNEAU Vessel Repair Entry No. C31-0005026-0 Date of Arrival: March 6, 1993 Port of Arrival: Valdez, Alaska

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                              HQ 112789

                           August 18, 1993

VES-13-18-CO:R:IT:C  112789 DEC

CATEGORY:  Carriers

Deputy Regional Director
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, California  90831

RE:  Vessel Repair; Inspection; Installation; Modification;
     Overhead; Segregation of Costs
     Vessel:  ARCO JUNEAU
     Vessel Repair Entry No. C31-0005026-0
     Date of Arrival:  March 6, 1993
     Port of Arrival:  Valdez, Alaska

Dear Sir:

     This is in response to your memorandum dated June 28, 1993,
which forwards for our consideration an application for relief from
duties assessed pursuant to 19 U.S.C.  1466 filed in connection with
the ARCO JUNEAU, vessel repair entry number C31-0005026-0.  Our
findings are set forth below.

FACTS:

     The ARCO JUNEAU is an American-flag vessel owned by ARCO
Marine, Inc.  The vessel had foreign shipyard work performed during
the period of August 2, 1993 - August 25, 1993.  Subsequently, the
vessel arrived in the United States at Valdez, Alaska on March 6,
1993, and a vessel repair entry was filed on the same day.

     An application for relief dated May 20, 1993, was timely filed
seeking remission from vessel repair duties.  The items submitted to
this office for review are set out below.

          Item No.                   Description  

           108-B                rudder nut-modification
           111                  chloropac piping
           422                  grab rail
           443                  pilot ladder
           508                  pump room strobe light
           712                  access manhole
           714                  butterworth opening
           901                  gyro compass installation
           902                  gas detection system
           903                  discharge strainer
                                 -2-


           904                  cargo pump
           908                  fathometer
           909                  radar replacement
           911                  towing girder renewed
           109                  tailshaft inspection
           301                  turbine couplings
           401-B                scrubber unit
           701                  tank fracture
           710                  butterworth openings
           906                  boiler rear wall
           907                  cargo pipe pump room
           ABS Survey           various surveys
           B.C. Taechang        overhead charge

ISSUE:

     Whether the cost of foreign shipyard work completed aboard the
subject vessel is dutiable pursuant to 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 the foreign or coastwise
trade.

     The treatment of the respective invoices submitted for review
are set out in detail below.

Invoice 108-B (rudder-nut modification)

     The applicant contends that the costs documented under this
invoice constitute a non-dutiable modification.  In support of its
contention, the applicant has submitted an invoice detailing the
operations performed upon the rudder nut together with a statement
that the new item does not constitute a restoration of the vessel
due to damage or deterioration.

     Over the course of years, the identification of modification
processes has evolved from judicial and administrative precedents. 
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.
                                 -3-


           (2)  Whether the item under consideration would remain   
                aboard a vessel during an extended layup.

           (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.

Before an item is to be construed as a part of the vessel, it must
be (1) a permanent attachment and (2) essential to the successful
operation of the vessel.   Otte v. United States, 7 C.C.P.A. 166,
169 (1916).

     Customs is satisfied that the operation described in this
invoice constitutes a non-dutiable modification which is not subject
to vessel repair duty.

Invoice 111 (chloropac piping installation)

     This item includes various operations connecting the chloropac
piping to the service line.  Upon completion of this work, the
damaged coating was repaired.

      Customs has held that painting existing portions of an
existing vessel is in the nature of maintenance and is, therefore, a
dutiable repair; whereas painting new sections and other
alterations/modifications to the hull and fittings of a vessel is
considered an integral part of the cost of the addition to the
vessel and is not dutiable.  Customs is satisfied that the operation
described in this invoice meets the definition of a modification. 
Accordingly, this item is not subject to duty.

Invoice 422 (grab rail)
Invoice 443 (pilot ladder)
Invoice 508 (pump room strobe light)
Invoice 712 (access manhole)

     Customs is satisfied that these operations constitute a
permanent incorporation into the vessel.  Accordingly, no duty is
owed with respect to these items.
     
Invoice 710 and Invoice 714 (butterworth opening)

     The applicant contends that these two invoices for the
construction of the butterworth openings constitutes a non-dutiable
modification.  However, a closer examination of the invoices reveals
that work performed on the existing pipes contained dutiable
repairs.  Specifically, the invoice makes reference to the "renewal"
of all cover gaskets.  Since the applicant did not document the
                                 -4-


segregation of costs in these invoice, both invoices are dutiable in
their entirety.  Headquarters Ruling 108567 (Sept. 10, 1986).  

Invoice 901 (gyro compass installation)

     Customs is satisfied that the vast majority of the work
described in this invoice constitutes a non-dutiable modification. 
However, the renewal of wiring is a dutiable operation.  Since the
cost of this repair is not segregated from the balance of the item,
this complete invoice is deemed dutiable.  Headquarters Ruling
108567 (Sept. 10, 1986).  Unless and until the applicant can
satisfactorily itemize the costs associated with each aspect of the
invoice, this item is dutiable.

Invoice 902 (gas detection system)
Invoice 903 (discharge strainer)
Invoice 904 (cargo pump)

     Customs is satisfied that the installation of these items
constitutes a permanent incorporation into the vessel.  Accordingly,
no duty is owed with respect to these items.

Invoice 906 (boiler rear wall)

     This invoice is for the renewal of insulation between the rear
wall tubes and inner casings of the boiler as well as for the re-
tiling of the rear wall of the port and starboard boilers.  These
operations clearly fall within the purview of 19 U.S.C.  1466 and
are dutiable.  Absent authenticated evidence stating the basis for
finding the re-tiling a modification, the presumption is that this
operation was carried out to restore deterioration.  This same
analysis applies to the insulation renewal.  Consequently, this item
is subject to vessel repair duty.  The segregated staging,
transportation, ventilation, lighting, and rigging costs are not
subject to duty.

Invoice 907 (cargo pipe room)

     This invoice is similar to Invoice 906 in that it contains 
various operations which involve the renewal of various parts of the
vessel.  Specifically, the invoice refers to the renewal of four
penetrations at the suction level, the renewal of piping, the
replacement of gaskets (presumably due to wear), and the renewal of
risers.  These items clearly describe repair operations. 
Accordingly, the operations contained in this invoice are dutiable
pursuant to 19 U.S.C.  1466.  The segregated staging,
transportation, ventilation, lighting, and rigging costs are not
subject to duty.

Invoice 908 (fathometer)
Invoice 909 (radar replacement)
Invoice 911 (towing girder renewed)


                                 -5-


     Invoice 908 describes the operation to be performed as "work to
renew Owner's furbished new hull transducer" and Invoice 909
describes the work to be performed as a renewal of the vessel's
radar.  In addition, Invoice 911 describes various renewal
operations with respect to the installation of the new towing
system.  Customs has consistently held that in order for an
operation to be a repair there must be a restoration or a making
over; the word "repair" contemplates an existing structure which has
become imperfect by reason of the action of the elements or
otherwise.  Admiral Oriental Line v. United States, T.D. 44886
(1931).  In this case, it is clear from the invoice that both of
these operations were carried out in an effort to restore the
fathometer (Invoice 908), the radar (Invoice 909), and the towing
girder system (Invoice 911).  Absent evidence of segregating non-
dutiable costs from dutiable costs, these items are dutiable
pursuant to 19 U.S.C.  1466.  The staging and transportation costs
associated with Invoice 909 and Invoice 911 are not subject to duty.

Invoice 109 (tailshaft inspection)

     This invoice is for the operations performed on the vessel in
connection with the tailshaft inspection and the stern tube after
seal renewal.  The invoice contains itemized costs for staging and
rigging which are not subject to the assessment of vessel repair
duties.  The balance of the invoice, however, is subject to duty. 
Customs reaches this conclusion based on our review of the numerous
items some of which the applicant clearly acknowledges as repairs. 
The remainder of the invoice is dutiable because it contains many
items which are ordinarily considered dutiable and because there is
no documentation depicting separate charges for each item.  When
there are no supporting documents segregating costs, Customs holds
the entire invoice dutiable.  In particular, Customs finds items h,
m, n, and p subject to vessel repair duty.  Unless and until the
applicant can produce authenticated documentation of the cost of
each item, the entire invoice is dutiable.

Invoice 301 (turbine couplings)

     The applicant contends that no duty is owed with respect to the
cost of the inspection of the flexible couplings.  In C.S.D. 79-
277, the Customs Service addressed the dutiability of inspections
and surveys stating that "[i]f the survey was undertaken to meet the
specific requirements of a governmental entity, classification
society, insurance carrier, etc., the cost is not dutiable even if
dutiable repairs were effected as a result of the survey."

     With increasing frequency, this ruling has been utilized by
vessel owners seeking relief not only from charges appearing on an
ABS or U.S. 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.

                                 -6-

     In C.S.D. 79-277, Customs 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.
     
     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 ABS).  Moreover, we note that C.S.D. 79-
277 does not exempt from duty repair work done by a shipyard in
preparation of a required survey.  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. 

     Following the rules set forth above, the Customs Service finds
that while the ABS inspection and testing of the couplings is not
subject to duty, this entire invoice is dutiable because it contains
dutiable items, but fails to segregate dutiable items from non-
dutiable items.  Specifically, the Customs Service finds to "hone
off edges," "to refit the casing with new gaskets," and to "renew
joint packing" to be dutiable repairs absent evidence to the
contrary.  Accordingly, this entire invoice is subject to vessel
repair duties. 

Invoice 401-B (scrubber unit)

     This invoice reflects the costs associated with preparations
for a Coast Guard inspection and related repairs performed in
anticipation of the inspection.  Customs is satisfied that the
segregation of costs between the inspection preparation and actual
repairs is sufficient proof upon which to make a determination of
dutiability.  Accordingly, Customs finds that the three hundred
sixty dollars ($360) listed in the invoice as repairs is dutiable
and the balance of the invoice is duty-free.

Invoice 701 (tank fracture) 

     This invoice reflects the operations performed in connection
with the vessel's tank fractures.  Customs is satisfied that the
segregation of costs between the inspection preparation costs,
staging, ventilation and lighting, and actual repairs is sufficient
proof upon which to make a determination of dutiability. 
Accordingly, the thirteen thousand nine hundred seventy-six dollars
($13,976) is dutiable and the balance of the invoice is duty-free.
     
American Bureau of Shipping (surveys)

     The costs included in this invoice are for ABS inspections.
Customs has consistently treated regulatory-required surveys not to
be subject to the vessel repair statute.  Accordingly, no duty is
owed with respect to this invoice. 
                                 -7-


B.C. Taechang (overhead charges)

     Customs has had occasion to consider the dutiability of so-
called "overhead" charges (see Headquarters Ruling 111170 (Feb. 21,
1991).  In that ruling, we cited a published Treasury Decision of
long standing (T.D. 55005(3) (Dec. 21, 1959)), wherein it was
determined that:

           Taxes paid on emoluments received by third
           parties for services rendered...and premiums
           paid on workmen's compensation insurance, are
           not charges or fees within the contemplation
           of the decision of the Customs Court, International
           Navigation Company v. United States, 38 USCR 5,
           CD 1836, and are therefore subject to duty as
           components of the cost of repairs under [section 1466].

     "Emoluments" as used in the cited decision would include all
wages, taxes, accounting fees, office space charges, inventory or
mark-up costs, purchasing costs, and management fees.  Certainly,
general and unspecified "overhead" charges such as those included in
the entry under consideration must be considered dutiable.

HOLDING:

     After thorough review of the evidence presented, and as
detailed in the Law and Analysis portion of this ruling, the
application for relief is granted in part and denied in part.

                                Sincerely,



                                          
                                Acting Chief
                                Carrier Rulings Branch