HQ 112449: Vessel Repair; Modification; Warranty; One-Year Benchmark; Filing of Claim Under Warranty; Time Limit; Overhead; Gas Free Certificate; 19 U.S.C. 1466; M/V PRESIDENT TRUMAN V-29; Entry No. C27-0054121-5.

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 112449
                                

                         March 31, 1993


VES-13-18-CO:R:IT:C  112449 GFM

CATEGORY:  Carriers

Chief, Technical Branch
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831

RE:  Vessel Repair; Modification; Warranty; One-Year Benchmark;
     Filing of Claim Under Warranty; Time Limit; Overhead; Gas
     Free Certificate; 19 U.S.C.   1466; M/V PRESIDENT TRUMAN 
     V-29; Entry No. C27-0054121-5.

Dear Sir:

     This letter is in response to your memorandum dated August
25, 1992, which forwards for our disposition a petition for
review filed in conjunction with the above-referenced vessel
repair entry.

FACTS:

     The PRESIDENT TRUMAN is one of three C-10 class conbulk or
"non-Panamax" vessels built for American President Lines, Ltd.
(hereinafter APL) by Howaldtswerke-Deutsche Werft AG (hereinafter
HDW) of Germany.  The subject vessel was delivered to APL on
April 22, 1988.  From January 26 through February 18, 1991, the
vessel underwent foreign shipyard operations at Kaohsuing, Taiwan
and Kobe, Japan.  Subsequent to the completion of the
aforementioned work, the subject vessel arrived and made entry in
the United States at San Pedro, California, on March 3, 1991.

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(a) provides, in
pertinent part, for payment of duty in the amount of 50 percent
ad valorem on the cost of foreign repairs to vessels engaged,
intended to engage, or documented under the laws of the United
States to engage in the foreign or coastwise trade.

ITEM 1-25 GAS FREE CERTIFICATES.....................$    4,600.00

     At the application stage, this item was incorrectly held
dutiable.  As petitioner correctly points out, the gas free
certificate relates to the prevention of fire and explosion
during welding and other hot-work operations.  Oxygen
verification procedures are a necessary corollary to some such
operations as they serve to indicate sufficient oxygen levels in
closed spaces.  The costs associated with obtaining a Gas Free
Certificate constitute ordinary and necessary expenses incident
to repair operations and are thus dutiable.  In liquidating these
charges, such charges are to be apportioned between the costs
which are to be remitted and those for which relief is not
warranted, and duty assessed on that portion of the charges
applicable to items which are not being remitted.  In the present
case, as the certificates related to inspections, they should be
pro-rated accordingly.

ITEM 4 (3.3-9) BALLAST TANK COATINGS................$   75,000.00

     This item represents charges for repairs made to ballast
tank coatings which petitioner asserts should be covered under
warranty.  At the application stage, it was determined that
because the applicant's claim was filed beyond the established
reasonable period of time, the charges were dutiable.  Petitioner
now reasserts its contention that such repairs should be covered
under warranty.

     Customs has previously considered the scope and effect of
the vessel repair statute as it relates to warranty clauses.  In
the case of Sea-Land Service, Inc. v. United States, 683 F. Supp.
1404 (1988), the Court addressed whether repair work performed on
a newly constructed vessel subsequent to its delivery to the
owner might be considered to be part of the new construction
contract.  Simply put, the Court considered whether "completion
of construction" is a viable concept so as to render the duty
provisions of 19 U.S.C. 1466(a) inapplicable if proven.  The
Court found completion of new construction to be a valid concept,
subject to specific conditions, which are:

     1.   "All work done and equipment added [must be] pursuant
          to the original specifications of the contract for the
          construction of the vessel ...."
     2.   "This basic standard is limited to work and equipment
          provided within a reasonable period of time after
          delivery of the vessel."

     The contract for construction of the vessel in that case
contained clauses guaranteeing for twelve (12) months any area of
the vessel for which the builder accepted responsibility under
the contract and specifications, conditioned upon written
notification from the owner of any covered defect within the
agreed upon 12-month period.

     In reviewing the warranty case on remand from the Court,
Customs had the opportunity to review the contract, the
specifications, and a so-called "guarantee notebook."  This
document consisted of numerous guarantee items, some generic in
nature and some specific, and represented the written
notification of defects from the owner to the builder as required
by the contract.  Each noted defect was recorded on a separate
sheet and assigned a "G" guarantee number.  Each was dated,
signed by an owner's representative and a builder's
representative, and contained a short narrative of the specific
complaint.

     In that case, we found that the court-ordered criteria had
been satisfied and that the "reasonable period of time" for the
warranty period was the one-year period specified in the
contract.  We have since held likewise in similar cases, and have
adopted the one-year limit as the benchmark for honoring new
construction warranties which otherwise qualify. See,
Headquarters Ruling Letters 110499, 111082, 111081, 110503, and
111086.

     In the case presently before us, petitioner claims that as
an inspection occurred on April 19, 20, and 21, 1989 (less than
one year from the April 22, 1988 delivery date of the vessel),
the "one-year benchmark" has been met.

     A review of the entire record reveals that an inspection of
the ballast tanks and other vessel areas was indeed conducted by
APL on April 19, 20, and 21, 1989.  However, the results of that
inspection and another inspection held on February 24-26, 1990,
were not sent to HDW until July 16, 1990, when APL formally
notified HDW of several ballast tank defects.  Thereafter, in
letter number 1586-JMD/HDW dated July 26, 1990, APL lodged a
formal claim for insurance coverage under warranty for said
ballast tank coatings.  On October 11, 1990, in letter number
1597 TSW/HDW, APL again wrote to HDW advising them of their plans
to repair said tanks at a theretofore undisclosed Asian shipyard
in January-February, 1991.  By letter dated October 14, 1990, HDW
expressed disagreement with APL's findings and made an offer of
compromise to settle the dispute for the sum of DM 30,000.00. 
     Regarding petitioner's claim that the "one-year benchmark"
has been met, we note that although inspections of the ballast
tanks undertaken by APL occurred on April 19, 20, 21, 1989, APL
did not notify HDW of the tank defects or its request for
coverage under warranty until July 16, 1990.  Thus, as some 15
months had passed before formal notification occurred, it is
clear that APL's claim for remission is time-barred. 
Accordingly, as neither of petitioner's theories provides a basis
for relief, the cost of this item ($ 75,000.00) is fully
dutiable.

ITEM 3.8-17 #4 PORT HFO TANK REPAIR.................$      400.00

     This item represents charges for staging and coatings which
were not separately segregated in the original application. 
Petitioner has herein submitted shipyard invoices showing a 
$ 395.00 charge for staging and a $ 95.00 charge for coatings. 
Accordingly, only that portion of the item relating to the
coatings ($ 95.00) is dutiable.

ITEM 4.1-3 BOW THRUSTER CLEANING & INSPECTION.......$      300.00

     This item represents charges for cleaning operations which
were held dutiable in the original application.  As petitioner
has herein submitted a document from the shipyard stating that
said cleaning was performed pursuant to inspection, and not
repair, the cost of the item ($ 300.00) is non-dutiable.

ITEM 3-3.10  HATCH COVERS AND COAMINGS
     Sub-item (4)...................................$   23,060.00 
     Sub-item (6)...................................$   30,571.00

ITEM 3-3.14  HATCH #1 & #2 COAMINGS.................$    1,020.00

     These items represent charges for hatch cover fractures
which are alleged to have occurred as a result of design defects. 
The record shows that petitioner timely notified the vessel
vendor of said defects and that similar charges were afforded
duty-free status in previous rulings relating to similar vessels
of the same class.  Petitioner claims that these so-called
"repairs" are not repairs at all, but are design defects entitled
to coverage under warranty.  In light of our extension of non-
dutiable treatment of the same defects in rulings relating to
each of the other similar vessels, and as the required
notification was made, we hold these too to be non-dutiable
modifications and/or improvements to correct design deficiencies. 
Thus, the combined cost of these items ($ 54,651.00) is non-
dutiable.



OVERHEAD CHARGES....................................$ 382,211.00 

     Each item listed in the petitioner's worksheet contains a
separate charge for "Duty-free Overhead @ $17.00 per hour."  In
the application, such charges were found to be dutiable pursuant
to T.D. 55005(3), December 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].

     Customs has held the term "emoluments" as used in the cited
decision to include all wages, taxes, accounting fees, office
space charges, inventory or mark-up costs, purchasing costs, and
management fees.  Consequently, general and unspecified 
"overhead" charges are considered dutiable.

     In response to our holding, the petitioner has resubmitted a
breakdown of the "overhead" charges in Exhibit A to include
charges for clerical services, electronic data processing,
accounting, insurance, general administration, education and
corporate expense.  In furtherance of his claim that these
charges are non-dutiable, counsel for petitioner cites two prior
Customs rulings (108953, dated January 7, 1988, and 109308, dated
May 26, 1988) wherein Customs held the cost of clerical expenses
(i.e., secretarial services, electronic data processing,
accounting services, etc.) to be analogous to non-dutiable costs
of drydocking and general services under C.I.E. 1188/60.

     Although Petitioner has resubmitted the same cost breakdown
for general services performed at the shipyard which are claimed
to represent non-productive overhead charges, the burden of
demonstrating the underlying justification for such charges and
their relationship to specific repair operations has still not
been met.  The charges shown are attributable to the operation of
the shipbuilding facility in general.  Consequently, the cost of
the item ($ 382,211.00) is fully dutiable.





    
HOLDING:

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

                                        Sincerely,





                                        Director
                                        International Trade