HQ 0110932 - Protest No. 30019 001219; M/V SEA-LAND FREEDOM, Voyages 78/79/80; Vessel Repairs; Modifications; Surveys - United States International Trade Commision Rulings

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HQ 110932

September 4, 1990

VES-13-18 CO:R:P:C 110932 BEW

CATEGORY: CARRIER

Chief, Technical Assistant
Pacific Region
U. S. Customs Service
One World Trade Center
Long Beach, California 90831

RE: Protest No. 30019 001219; M/V SEA-LAND FREEDOM, Voyages 78/79/80; Vessel Repairs; Modifications; Surveys

Dear Sir:

This is in reference to a memorandum from your office which transmitted protest No. 30019 001219, relating to vessel repair entry no. 110-0103656-2, concerning the M/V SEA-LAND FREEDOM, Voyage Nos. 78/79/80, which arrived at the port of Tacoma, Washington on October 8, 1987. The entry was filed on October 8, 1987.

FACTS:

In September 1987, while in Kobe, Japan,, the vessel SEA- LAND FREEDOM underwent various shipyard operations. The dutiability of these operations has previously been considered by your office. The protestant elected not to file an Application for Relief. The entry was liquidated on August 11, 1989. The protest was timely filed on November 7, 1989. Included in your considerations was the matter of whether the cost associated with the installation of the following items is dutiable under the statute:

Item 7/87-1 - Rope Guard,

Item 7/87-3 - New door on Economizer preheating casing,

Item 7/87-4 - Stern Tube Bearing Lube Oil System

Item 7/87-6 - Gas Economizer drain,

Item 7/87-7 - Stern Tube Boss,

Item 7/87-11 - Stern Tube Seal Modification,

Item 7/87-13 - Purifier Separator Driven Feed pumps,

Item 7/87-18 - Lube Oil Filing Line,

These are the only items which are presently being protested.

ISSUES:

Whether certain work performed in a foreign country constitutes modifications/alterations/additions to the hull and fittings rather than equipment purchases or repairs within the meaning of 19 U.S.C. 1466?

LAW AND ANALYSIS:

Section 466, Tariff Act of 1930, as amended (19 U.S.C. 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.

A leading case in the interpretation and application of 1466 is United States v. Admiral Oriental Line et al., 18 C.C.P.A. 137 (T.D. 44359 (1930)). That case distinguished between equipment and repairs on one hand and permanent additions to the hull and fittings on the other, the former being subject to duty under 1466.

The Court in Admiral Oriental, supra., cited with approval an opinion of the Attorney General (27 Op. Atty. Gen 228). That opinion interpreted 17 of the Act of June 26, 1884 (23 Stat. 57), which allowed drawback on vessels built in the United States for foreign account, wholly or in part of duty-paid materials. In defining equipment of a vessel, the Attorney General found that items which are not equipment are:
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...[and] are material[s] used in the construction of the vessel...

While the opinion of the Attorney General interpreted a provision of law other than 1466 or a predecessor thereto, it is considered instructive and has long been cited in Customs Service rulings as defining permanent additions to the hull and fittings of a vessel.

Under long-standing and consistently applied administrative policy, an installation, even one of a permanent nature, is considered to be a dutiable repair rather than a modification if the installation addresses a repair need. Thus, if an area of a vessel is enhanced by the replacement of one permanent installation with another, the operation is considered dutiable if evidence reveals that a defect or wastage was present in the former installation, which condition was cured by replacement.

In the present case, the protestant claims that the installation of the subject items is a design and operational improvement over the old one. It is claimed that these items were not found to be damaged at the time they were replaced and that the permanent installation of the subject items is to improve the efficiency of the vessel's operation and should be properly considered a non-dutiable modification.

Examination of the entire record, including that portion of the invoice relating to the subject items, reveals that the subject items were installed to enhance the operation of the vessel's efficiency and are permanent installations to the vessel's hull and fittings. Accordingly, we find that the cost associated with the subject items with the exception of Item No. 7/87-7, Stern Tube Boss is non-dutiable. The following items are nondutiable modifications to the vessel's hull and fittings:

Item 7/87-1 - Rope Guard,

Item 7/87-3 - New door on Economizer preheating casing,

Item 7/87-4 - Stern Tube Bearing Lube Oil System

Item 7/87-6 - Gas Economizer drain,

Item 7/87-11 -Stern Tube Seal Modification,

Item 7/87-13 - Purifier Separator Driven Feed pumps,

Item 7/87-18 - Lube Oil Filing Line,

In Headquarters ruling 106543 JM, we held that mere cleaning operations are not dutiable. However, cleaning operations which remove rust and deterioration or worn parts, and which are a necessary factor in the effective restoration of a vessel to its former state of preservation, constitute vessel repairs (See C.I.E. 429/61). The Drydocking survey states:
a) The stern boss was examined and found physically damaged by cavitation over the entire surface and circumference in way.
b) The all erroded [sic] cavities on end surface and circumfernce [sic] of stern boss were cleaned and smoothly ground out to the sound metal and stern boss end in way was built up by welding using lqw hydrogen electrodes....

Upon completion of repairs mentioned above, stern boss end was visually examine and tested by dye penetrant inspection and all found satisfactory.

Accordingly, the cost associated with the inspection and installation of Item 7/87-7 Stern tube boss is dutiable.

Customs has held that where periodic surveys are undertaken to meet the specific requirements of a classification society, insurance carrier, etc., the cost of the surveys is not dutiable even when dutiable repairs are effected as a result thereof; however, in the liquidation process Customs should go beyond the mere labels of "continuous" or "ongoing" before deciding whether the item is dutiable. If an inspection or survey is conducted as a part of an ongoing maintenance and repair program labelled "continuous" or "ongoing" the cost is dutiable. Also, if the survey is to ascertain the extent of damage sustained, or to ascertain if the work is adequately completed, the costs are dutiable as part of the repairs which are accomplished pursuant to the holdings in C.I.E. 429/61, C.S.D. 79-2, and C.S.D. 79- 277. Accordingly, the cost of item 9, Drydocking survey associated with the inspection of Item 7/87/-7 Stern tube boss is dutiable.

The protest is granted in part and denied in part as set forth in the findings above.

HOLDINGS:

1. In light of our present findings based upon the evidence and as stated in the law and analysis section of this ruling, we find that the installation of the most of the subject items was in the nature of a non-dutiable permanent modification to the hull and fittings of the vessel. Items Nos. 7/87-1, 7/87-3, 7/87-4, 7/87-6, 7/87-11, 7/87-13, and 7/87-18 constitutes modifications/alterations/additions to the hull and fittings rather than repairs. As such, the cost of this work in not dutiable under 19 U.S.C. 1466. The protest is granted as to these items.

2. The Drydocking Survey shows that repairs were accomplished as a part of the installation of Item 7/87/7 Stern Tube Boss. Under the circumstances in this case, the cost associated with the inspection and installation of Item 7/87/7 Stern Tube Boss and that portion of the survey relating to Item 7/87/7 is subject to duty under 19 U.S.C. 1466. The protest is denied as to Item 9 - Drying Docking Survey and Item 7/87/7 Stern Tube Boss.

Sincerely,

B. James Fritz

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