HQ 0110928 - Protest No. 27049-003988; PRESIDENT KENNEDY, V-08. Warranty repairs; 19 U. S.C. 1466; Sea-Land Service, Inc.v. U.S. - United States International Trade Commision Rulings

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HQ 110928

August 8, 1990

VES-13-18-CO:R:P:C 110928 BEW

CATEGORY: CARRIER

Chief, Technical Branch
Pacific Region
1 World Trade Center
Long Beach, California 90831

RE: Protest No. 27049-003988; PRESIDENT KENNEDY, V-08. Warranty repairs; 19 U. S.C. 1466; Sea-Land Service, Inc.v. U.S.

Dear Sir:

This is in reference to a memorandum dated February 26, 1990, from your office which transmitted protest No. 27049- 003988, relating to vessel repair entry No. C-27-0075202-8, concerning the PRESIDENT KENNEDY Voyage No. 08. The entry was filed on April 24, 1989. Our findings are set forth below.

FACTS:

The PRESIDENT KENNEDY is one of three C-10 or "non-Panamax" vessels (so named because their configurations include a beam too wide to transit the Panama Canal) built for American President Lines, Ltd. (APL) by Howaldtwerke-Deutsche Werft AG (HDW) in Kiel, Germany. The subject vessel was delivered to APL on July 15, 1988, and had work performed in April 1989, by HDW and other foreign yards. Subsequent to the completion of the aforementioned work, the subject vessel arrived in the United States at San Pedro, California, on April 22, 1989.

A vessel repair entry covering the voyage in question was filed on April 24, 1989. In a letter dated December 13, 1988, from Mr. Robert E. Weeks, Marine Customs Coordinator, APL, to the Chief, Liquidation Branch, U.S. Customs Service, San Francisco, it was stated that certain foreign work performed on the PRESIDENT KENNEDY was pursuant to a new vessel construction warranty which extended one year from the date of delivery and therefore was not subject to duty. In support of this claim a copy of the construction contract (including the warranty provision) was submitted. However, no application for relief was filed to cover the particular entry in question. Furthermore, the items claimed to be subject to warranty were not identified
in the December 13, 1988, letter, but rather were marked as such on the entry. In view of the failure to submit an application, the entry was forwarded for liquidation which took place on September 22, 1989.

A protest (with copies of invoices and job control forms) was timely filed on December 11, 1989, covering entry no. C27- 0075202-8 claiming that the following items were covered by the warranty clause of the construction contract: (Items 1, 2, 6, 11 and 12)

In letters to Mr. Weeks, dated September 22, 1989, we stated that APL failed to submit the requisite evidence necessary to substantiate the warranty claims of this and other pending APL protests regarding the C-10 vessels. We therefore allotted APL a period of time until December 21, 1989, to submit evidence that the contractors either paid the invoices in question or refunded APL the costs involved pursuant to the terms of the warranty. Furthermore, we emphasized that the requested evidence must indicate not only that a particular item in question was covered by the warranty but that the entire cost was reimbursed.

By letters dated November 2 and 6, 1989, APL provided the following additional documentation in support of duty-free treatment of certain identified warranty items: affidavits from the Head Manager, Guarantee, HDW, that the work in question was performed pursuant to the contract warranty provisions and was necessary to satisfy the original specifications of the contract for the construction of the vessel; letters of agreement signed by officials of both APL and HDW setting forth warranty items that have been agreed and paid with respect to the subject vessels and items that have been agreed in principle; copies of wire transfer receipts by APL of sums of money from HDW evidencing proof of payment of warranty claims; and a certification of an APL officer stating that the protested items for which a refund is requested were included in the agreements reached with HDW and that payment was received for these items by APL.

ISSUE:

Whether the foreign work performed on the subject vessel for which the protestant seeks relief is part of the original construction pursuant to a warranty clause or dutiable repairs within the meaning of 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 foreign or coastwise trade, or vessels intended to engage in such trade.

The Supreme Court has determined that although a vessel is a vehicle of dutiable articles, the vessel itself is not a dutiable article and thus the cost of foreign construction of a vessel is not dutiable. The Conqueror, 166 U.S. 110, 17 S.Ct. 510, 41 L.Ed. 937 (1897). Furthermore, the vessel's original equipment is not dutiable since it is part of the construction cost of the vessel. (See 22 Op. Atty. Gen. 360 (1899)).

In Sea-Land Service, Inc. v. United States, 638 F.Supp 1404 (CIT; March 31, 1988), the court set forth criteria to be used in determining whether a specific item is part of the original construction of the vessel or is a dutiable repair under 19 U.S.C. 1466. Some of the salient factors to be considered include the terms and nature of the guarantee or warranty clause (under the terms of the original contract), when the work was actually performed, and the nature and purpose of the work and the equipment provided. It is important to determine whether the "guarantee clause" is indeed a warranty of fitness for use and quality, and is limited in time to what may properly be deemed part of the original construction. Id. at 1407.

Finally, the court stated that the duration of the warranty clause must be reasonable, and only long enough to permit the owner of the vessel to determine whether there has been compliance with the construction specifications, and to ascertain whether the work performed pursuant to the warranty clause is related to compliance with the specifications set forth in the original contract for the construction of the vessel. Hence, all work performed and equipment added which is not encompassed by the contract are dutiable items under the foreign repair statute. Id. at 1407.

In the instant case, the work in question was performed within the one year duration of the warranty, the yard which constructed the vessel acknowledged coverage of the work under the warranty, and said yard refunded APL the full amount of the expenses covering the work.

Accordingly, despite the failure to submit specific invoices regarding these items, it is our determination that the protestant has submitted evidence sufficient to substantiate their claim that the work in question (i.e., Items 1, 2, 6, 11, and 12) is nondutiable pursuant to the warranty provisions of the original contract for construction.

HOLDING:

The foreign work performed on the subject vessel for which the protestant seeks relief is part of the original construction pursuant to the warranty clause and therefore is nondutiable.

Accordingly, the protest is granted.

Sincerely,

B. James Fritz

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