HQ 0111230 - Protest No. 1001-0-001426; EXXON SAN FRANCISCO - United States International Trade Commision Rulings

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HQ 111230

November 8, 1990

VES-13-18-CO:R:P:C 111230 GV

CATEGORY: CARRIER

Deputy Assistant Regional Commissioner
Classification and Value Division
ATTN: Regional Vessel Repair Liquidation Unit 6 World Trade Center
New York, New York 10048-002980

RE: Protest No. 1001-0-001426; EXXON SAN FRANCISCO

Dear Sir:

Your memorandum dated July 31, 1990, forwarded a protest regarding vessel repair entry no. 1001-86-446013-2. Our findings are set forth below.

FACTS:

The EXXON SAN FRANCISCO is a U.S.-flag vessel owned by Exxon Shipping Company ("Exxon") of Houston, Texas. The subject vessel had shipyard work performed on her in Arno shipyard in Brest, France, during the period of June 12, 1986 through July 14, 1986. Subsequent to the completion of this work the vessel arrived in the United States in New York, N.Y. on July 28, 1986.

A vessel repair entry was filed on September 12, 1986. An application for relief, dated October 23, 1986, was filed requesting relief from certain vessel repair duties. Pursuant to several telephone conversations between counsel for Exxon and Customs New York Vessel Repair Liquidation Unit (VRLU), a revised application for relief, dated January 13, 1987, was submitted containing revised invoices, additional claims for relief, and additional supporting evidence. By letter dated June 12, 1987, the New York VRLU advised Exxon that their application had been forwarded to the Carrier Rulings Branch, Customs Headquarters, for review. By memorandum dated November 23, 1987 (VES-13-18- CO:R:P:C 109005 LLB) the Chief, Carrier Rulings Branch granted the application in part and denied it in part. This memorandum was transmitted to Exxon from the New York VRLU by letter dated December 16, 1987, wherein Exxon was advised of its right to file a petition for review of the decision within 30 days of its
written notice of Customs decision (i.e., until January 15, 1988) or the entry would be liquidated based on the November 23, 1987 memorandum. On January 12, 1988, Exxon notified Customs that it would not file a petition.

By letter dated January 22, 1988, and subsequent letters dated May 10 and May 30, 1988, Customs requested that Exxon provide additional documentation regarding a variety of parts and materials listed on the shipyard invoices and claimed to be "owner furnished," "owner supplied," "vessel furnished," etc. In response to these requests Exxon, by letters dated April 15, 1988, and February 7, 1989, provided invoices, purchases orders, and additional documentation to support their claim that the parts and materials in question were U.S.-manufactured and purchased.

The entry was liquidated on November 13, 1989. On February 9, 1990, a timely protest was filed claiming the following: (1) the costs of U.S.-manufactured and purchased materials are nondutiable; (2) cleaning operations and thickness gauging are nondutiable; (3) the reduction of overall foreign costs by $40,000 due to a penalty provision in the repair contract requires concomitant apportioned reduction of vessel repair duties assessed thereon; and (4) the installation of tank access ladders and the delivery of steel claimed to be constructed into a swimming pool on board the subject vessel after its departure from the foreign shipyard constitute nondutiable modifications.

ISSUES:

1. Whether evidence is presented sufficient to prove that the parts and materials for which the protestant seeks relief were U.S.-manufactured and therefore nondutiable under 19 U.S.C. 1466.

2. Whether evidence is presented sufficient to prove that the cleaning operations and thickness gauging for which the protestant seeks relief are nondutiable costs under 19 U.S.C. 1466.

3. Whether the reduction in the total cost of the repairs pursuant to a penalty provision in the repair contract results in an apportioned reduction of vessel repair duties assessed pursuant to 19 U.S.C. 1466.

4. Whether evidence is presented sufficient to prove that the installation of tank access ladders and the delivery of steel claimed to be constructed into a swimming pool on board the subject vessel after it departed the foreign shipyard constitute modifications so as to render the costs thereof nondutiable under 19 U.S.C. 1466.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466, provides in pertinent part for the 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.

In regard to the applicant's first claim for relief, we note that in response to requests for advice regarding the dutiability under section of 1466 of equipments, parts, repair materials, etc., which have been manufactured and purchased in the United States for installation abroad on U.S.-documented vessels, Customs, by memorandum dated April 19, 1989, and published in the Customs Bulletin of May 10, 1989, held that the use of foreign labor to install U.S. parts subjects both the parts and labor to duty. The memorandum further held that the installation of such parts by U.S. residents or regular crew labor warrants remission pursuant to section 1466(d)(2).

Upon further review of this matter, however, it appears that the implementation of Customs policy as set forth in the May 10, 1989, Customs Bulletin should have been preceded by the publication of a notice in the Federal Register soliciting comments from interested parties. Accordingly, until such time as said notice is published, Customs will uphold its position as delineated in T.D. 75-257, which held that where equipment, parts, repair materials, etc., which have been manufactured and purchased in the United States are installed abroad on U.S.- documented vessels by other than U.S. residents or regular crew, only the labor alone is dutiable. If the installation of such articles is performed by U.S. residents or the regular crew, remission is warranted pursuant to section 1466(d)(2).

In our adherence to the policy set forth in T.D. 75-257, however, it has come to our attention that affidavits and/or other documentation have been submitted which misrepresent the place of manufacture of the articles in question. Inasmuch as we have come to learn of this misrepresentation, it is our policy to require evidence beyond an affidavit from an interested party to establish U.S. manufacture and U.S. purchase. Therefore, we require direct evidence of U.S. manufacture (e.g., an affidavit by the equipment manufacturer) as well as U.S. purchase for relief to be granted.

In the protest currently under consideration, the protestant has submitted invoices, purchase orders, and shipping releases. While it is apparent that this documentation is sufficient proof of U.S. purchase, it is insufficient for purposes of proving U.S. manufacture. Accordingly, absent the requisite evidence the protestant's claim with respect to these parts and materials is
denied. However, we will delay the final consideration of this protest for a period of 60 days from the date Exxon is notified of our decision by the New York VRLU so that direct evidence of U.S. manufacture may be submitted.

In regard to the protestant's second claim for relief (i.e., the thickness gauging in Item 37, and the cleaning in Items 96 and 97 of the Arno invoice are nondutiable), we note the following.

The protestant contends that the thickness gauging covered by Item 37 is related to a nondutiable survey (see Exhibit G of the protest) which Customs found to be dutiable in its November 23, 1987, ruling. Although Exxon does not specifically challenge Customs finding with respect to the dutiability of the survey (its cost was not segregated on the ABS invoice from an unquestionably dutiable hull repairs survey) it is claimed that the cost of thickness gauging in Item 37 is nondutiable. The protestant cites item 17 on page 3 of the ABS report where thickness gauging appears under the heading "Continuation of Special Survey Hull No. 3." The thickness gauging listed thereunder took place at ballast tank nos. 3 and 7, center tank nos. 2 and 4, "Internals in forepeak as deemed necessary," and "Suspect areas throughout the vessel." Upon further review of this survey, we note that items 19.7 (No. 3 Port Ballast Tank), 19.8 (No. 3 Starboard Ballast Tank), and 19.9 (No. 4 Center Cargo Tank) all contain the statement, "Minor fractures in scattered locations veed out and rewelded." In addition, items 19.16 (No. 7 Port and Starboard Ballast Tanks) and 19.17 (Forepeak Tank) reference numerous repairs.

Accordingly, notwithstanding the issue of the dutiability of the survey in question (which we maintain is dutiable), it is apparent that the cost of thickness gauging in Item 37 of the Arno invoice is related to dutiable repair work and therefore remains dutiable.

In regard to the cleaning costs under dispute, we note that notwithstanding the fact that the issue of dutiability of cleaning costs is currently pending before the U.S. Court of International Trade (see Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc., v. United States, Court No. 89-12- 0062), Customs has long held that cleaning is not dutiable unless it is performed as part of, in preparation for, or in conjunction with dutiable repairs (which includes coating/painting) 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, T.D.'s 45001 and 49531.

Item 96 (Boiler Water Side Cleaning and Repairs) is conceded by the protestant to cover dutiable repairs (i.e., repair casing leaks, renewals, etc.), however, the protestant claims that the
cleaning costs listed under the same item number are nondutiable because they were not done in preparation for, or as a result of, the repair work, and were segregated from the dutiable repair costs. We do not agree. The mere fact that otherwise related costs are itemized separately does not in and of itself preclude the assessment of duty. Furthermore, a review of the invoice provides no indication that the cleaning was unrelated to the repairs, a burden of proof which must be met by the protestant to prove nondutiability. Accordingly, absent evidence to the contrary, all costs listed under Item 96 remain dutiable.

Item 97 (Fire Side Cleaning - Main Boiler) is claimed by the protestant to be strictly cleaning unrelated to dutiable repairs. Upon reviewing this item, we note that the only reference to repairs appears in subsection F which states "NOTE: A separate item will be written to cover repairs dealing with leaks." The record is devoid of any such separate item. Accordingly, we are of the opinion that the cost of cleaning in Item 97 is nondutiable.

In regard to the protestant's third claim for relief (i.e., the contract penalty reduction) Customs recognizes such discounts provided they are acknowledged through documentation by the foreign shipyard (see C.I.E. 227/63). Although such an acknowledgement appears on the last page of the shipyard invoice the discounted amount was calculated from the total amount of the invoice instead of from each individual item. In view of the fact that this invoice contains both dutiable and nondutiable work, the discount is not properly apportioned between such work. Accordingly, the $40,000 shipyard discount is only to be considered as apportioned between the dutiable and nondutiable costs.

In regard to the protestant's fourth and final claim for relief (that the steel supply listed in Item 205 and the cargo and ballast tank access ladders listed in Item 55 (see Appendix K of the application and Appendix U of the revised application) constitute nondutiable modifications) we note the following.

A leading case in the interpretation and application of section 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 section 1466.

The Court in Admiral Oriental, supra., cited with approval an opinion of the Attorney General (27 Op. Atty. Gen. 288). That opinion interpreted section 17 of the Act of June 26, 1884, (23 Stat. 57, which allowed drawback on the vessels built in the U.S.
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 section 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.

For purposes of section 1466, dutiable equipment has been defined as:

...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. (T.D. 34150 (1914)).

It should be noted that the fact that a change or addition of equipment is made to conform with a new design scheme, or for the purpose of complying with the requirements of statute or code, is not a relevant consideration. Therefore, any change accomplished solely for these reasons, and which does not constitute a permanent addition to the hull and fittings to the vessel, would be dutiable under section 1466.

In regard to the cargo and ballast tank access ladders, we agree that they constitute nondutiable modifications to the subject vessel. However, we do not reach the same conclusion with respect to Item 205. The protestant concedes the shipyard invoice merely shows that a large quantity of steel was supplied, uninstalled. It is claimed, however, that the vessel's crew used this steel to construct a swimming pool on board after departing France on July 14, 1986. The record contains no evidence to support this finding. Accordingly, Item 205 remains dutiable.

HOLDINGS:

1. The evidence presented is insufficient to prove that the parts and materials for which the protestant seeks relief were U.S.-manufactured and therefore nondutiable under 19 U.S.C. 1466. However, we will delay final liquidation of this entry for a
period of 60 days from the date of notification by the New York VRLU to the protestant so that direct evidence of U.S. manufacture may be provided.

2. The evidence presented is insufficient to prove that the cleaning operations in Item 96 and thickness gauging costs for which the protestant seeks relief are nondutiable under 19 U.S.C. 1466 in view of the fact that such costs were incurred in conjunction with dutiable repairs.

3. The reduction in the total cost of repairs pursuant to a penalty provision in the repair contract results in a reduction of vessel repair duties assessed pursuant to 19 U.S.C. 1466 apportioned between those costs which are dutiable and those costs which are nondutiable.

4. The evidence presented is sufficient to prove that the installation of tank access ladders is a modification and therefore nondutiable under 19 U.S.C. 1466. However, the evidence presented is insufficient to prove that the steel in Item 205 delivered to the vessel was constructed into a swimming pool by the vessel's crew so as to constitute a nondutiable modification under 19 U.S.C. 1466.

Accordingly, the protest is granted in part and denied in part.

Sincerely,

Stuart P. Seidel

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