HQ 0111338 - Vessel Repair Entry No. 906-1511589-7; NORTHERN EAGLE V-1; U.S. Parts; U.S. Labor; 19 U.S.C. 1466 - United States International Trade Commision Rulings

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HQ 111338

January 31, 1991

VES-13-18-CO:R:IT:C 111338 GEV

CATEGORY: CARRIER

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

RE: Vessel Repair Entry No. 906-1511589-7; NORTHERN EAGLE V-1; U.S. Parts; U.S. Labor; 19 U.S.C. 1466

Dear Sir:

This is in response to your memorandum dated September 28, 1990, transmitting a supplemental petition regarding the above referenced vessel repair entry. Our findings on this matter are set forth below.

FACTS:

The NORTHERN EAGLE is a U.S.-flag vessel owned by Northern Eagle Partners, L.P., of Seattle, Washington. The subject vessel was converted from a container vessel to a surimi factory stern trawler in Ulsteinvik, Norway, during the period of February 26, 1987, through April 1, 1988.

Subsequent to the completion of the above work the subject vessel arrived in the United States at Seattle, Washington on April 29, 1988. A vessel repair entry was filed on the date of arrival. Pursuant to an authorized extension of time, an application for relief, dated July 27, 1988, was timely filed. By letter dated June 29, 1989 (ruling 110073) Customs ruled on the application. This ruling was forwarded by letter dated October 16, 1989, from Customs San Francisco VRLU to the applicant. A petition for review, dated November 13, 1989, was timely filed. By letter dated July 17, 1990 (ruling 110684) Customs ruled on the petition, however, those electronic materials purchased from Harris Electric, Inc., and Item 66.1 covering the installation of refrigeration plants, were inadvertently omitted from consideration. Subsequently, a supplemental petition was submitted requesting relief for these items.

ISSUE:

Whether the work performed on the subject vessel for which the petitioner seeks relief is dutiable under 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 Customs and Trade Act of 1990 (Pub. L. 101-382) which amends 19 U.S.C. 1466, exempts from duty under the statute, the cost of spare repair parts or materials which have been previously imported into the United States as commodities with applicable duty paid under the Harmonized Tariff Schedule of the United States (HTSUS). The amendment specifies that the owner or master must provide a certification that the materials were imported with the intent that they be installed on a cargo vessel documented for and engaged in the foreign or coasting trade.

The certification required by 19 U.S.C. 1466(h)(2) as to the vessel's documentation (foreign or coasting trades) and service, will be made by the master on the vessel repair entry (CF 226) at the time of arrival. The fact of payment of duty under the HTSUS for a particular part must be evidenced as follows. In cases in which the vessel operator or a related party has acted as the importer of foreign materials, or where materials were imported at the request of the vessel operator for later use by the operator, the vessel repair entry will identify the port of entry and the consumption entry number for each part installed on the ship which has not previously been entered on a CF 226. In cases in which the vessel operator has purchased imported materials from a third party in the United States, a bill of sale for the materials shall constitute sufficient proof of prior importation and HTSUS duty payment. This evidence of proof of importation and payment of duty must be presented to escape duty and any other applicable consequences.

In addition, we require certification on the CF 226 or an accompanying document by a person with direct knowledge of the fact that an article was imported for the purpose of either then- existing or intended future installation on a company's vessels. Ordinarily, the vessel's master would not have direct knowledge of that fact, and an agent may also be without such knowledge.

Customs has in the past linked this duty remission provision to the duty assessment provision in subsection (a) of the statute. In the face of argument to the contrary we have held that a two-part test must be met in order for remission of duty to be granted: first, that the article must be of U.S. manufacture; and, second, it must be installed by a U.S.-resident or regular vessel crew labor. The reason for this position is that (d)(2) refers to "such equipments or parts...", etc., without any other logical placement for the word "such" occurring in that subsection. We inferred that "such" articles must refer to those installed under subsection (a), absent any other reasonable predication. The new amendment puts this issue to rest; it is clear that as concerns foreign-made parts imported for consumption and then installed on U.S. vessels abroad, the labor required for their installation is separately dutiable. A part may now be considered exempt from vessel repair duty albeit the foreign cost labor is dutiable.

Uniform treatment will be accorded to parts sent from the United States for use in vessel repairs abroad, regardless of whether they are proven to be produced in the U.S., or have been proven to have been imported and entered for consumption with duty paid. In both cases, the cost of the materials is duty exempt and only the cost of foreign labor necessary to install them is subject to duty. Crew member or U.S.-resident labor continues to be free of duty when warranted.

The effective date of this amendment makes this section applicable to any entry made before the date of enactment of this Act that is not liquidated on the date of enactment of this Act, and any entry made--

(A) on or after the date of enactment of this Act, and
(B) on or before December 31, 1992.

Since the subject entry has not been liquidated, the new section 1466(h) is applicable to this entry as it relates to spare parts.

In regard to the electronic materials purchased from Harris Electric, Inc. of Seattle, Washington, we note that the record contains a letter, dated November 14, 1989, from the Manager, Electronics Division, Harris Electric, Inc., stating that the electronic materials in question included both foreign and U.S.- manufactured materials which were shipped from the United States to Ulsteinvik, Norway, for delivery to the NORTHERN EAGLE. The letter further states that all of the materials were installed by employees of Harris Electric, Inc., all of whom were U.S. citizens who travelled to Norway for the installation. A five page invoice dated August 11, 1987, listing the electronic materials was included with the aforementioned letter.

Accordingly, the record supports a finding that the electronic materials purchased from Harris Electric, Inc. and the labor necessary to install them are nondutiable.

In regard to Item 66.1 covering the installation of refrigeration plants, 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.

Upon reviewing the record with regard to the petitioner's claim, we note that Item 66.1 covering the installation of refrigeration plants constitutes nondutiable modifications.

HOLDING:

The work for which the petitioner seeks relief is nondutiable under 19 U.S.C. 1466.

Accordingly, the supplemental petition is granted.

Sincerely,

B. James Fritz

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