HQ 0110741 - Newark Vessel Repair Entry No. 514-3003356-6 dated December 8, 1988; S.S. EXPORT FREEDOM, Voyage No. 140. Application; drydocking; modifications; casualty; "departed a Port"; "passed upon the seas"; inspection and cleaning; surveys; owner-supplied spare parts; Customs and Trade Act of 1990; P.L. 101-382; 19 U.S.C. 1466; 19 U.S.C. 1466(h); 19 CFR 4.14 - United States International Trade Commision Rulings

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HQ 110741

December 3, 1990

VES-13-18 CO:R:P:C 110741 BEW

CATEGORY: CARRIER

Deputy Assistant Regional Commissioner
Commercial Operations
ATTN: Regional Vessel Repair Liquidation Unit New York, New York 10048-0945

RE: Newark Vessel Repair Entry No. 514-3003356-6 dated December 8, 1988; S.S. EXPORT FREEDOM, Voyage No. 140. Application; drydocking; modifications; casualty; "departed a Port"; "passed upon the seas"; inspection and cleaning; surveys; owner-supplied spare parts; Customs and Trade Act of 1990; P.L. 101-382; 19 U.S.C. 1466; 19 U.S.C. 1466(h); 19 CFR 4.14

Dear Sir:

This is in reference to a memorandum from your office which transmitted an application for relief from duties filed by Farrell Lines, Inc., relating to vessel repair entry No. 514- 3003356-6 concerning foreign repairs performed on the S.S. EXPORT FREEDOM, voyage 140.

FACTS:

The record shows that the shipyard work in question was performed on the subject vessel in Kobe, Japan, during the month of April 1988. The subject vessel arrived in the United States at the port of Newark, New Jersey, on May 8, 1988.

The entire vessel repair entry involves a potential duty of $500,000.

The applicant claims that relief for the subject items should be granted because the items should be classified as nondutiable items covered under title 19, United States Code, section 1466 and section 4.14 of the Customs Regulations.

The applicant claims that certain repairs and equipment purchases described in the documents were necessitated by a casualty, i.e., damage sustained to the vessel due to the striking of the dock at the port in Norfolk, Virginia. It claims that the vessel was compelled, because of damage, to make repairs and to purchase such equipment to secure the safety and seaworthiness of the vessel to enable it to reach its port of destination.
You have requested our advice concerning the following repairs which relate to general services, general repairs, modifications and improvements, repairs due to casualty and owner-supplied parts and materials.

Part I General Services, Drydocking, Inspection and Surveys Account

Item 1 General Services
Sub-item (m) Gas free certificate
Item 7 Sea Valves
Item 9 Anchor chains
Item 21 Boiler valves
Item 27 Main air compressor
Item 33 L.O. service pump and motor
Item 34 Steering engines
Item 48 General cleaning
Item 64 Main circulator motor
Item 70 Deep tank cleaning

Part II Major modifications and Improvements

Item 75 Hatch Dog Modification
Item 76 Ballast Tank Coating

Part III Repairs Account

Item 83 $99.00 faulty USA parts
Item 100 $26.00 Transportation and cleaning Item 101 $12.00 Transportation and cleaning Item 102 $15.00 Transportation and cleaning

Part IV Casualty Damages

Part V Electrocatalytic Ltd. Invoice No. 2668

Part VI Rom Yam Ltd. Invoice No. 0772

Part VII Alhoutyam Ltd. Invoice No.13980

Part VIII Rom Yam Ltd. Invoice No. 0745

Part IX Vessel Supplied Materials and Other Documentary Evidence

Item 1 Coatings and solvents
Item 2 Line shaft bearing - purchase of oil Item 3 Main turbines - rubber joints
Item 4 Boiler mounts
Item 5 Main condenser - zinc plates
Item 6 Main air compressor
Item 7 Main air ejector - butterfly valves Item 8 L.O. Service pumps - bearings
Item 9 Steering engines
Item 10 Fuel oil service pump
Item 11 Boiler cleaning - gaskets
Item 13 Port and Starboard boiler retubing Item 14 Main circulator pump
Item 15 Main engine H.P. bleed line
Item 16 After peak tanks
Item 17 General Service pump suction
Item 18 Misc. Deck Repairs
Item 19 Back pressure relief valve
Item 20 Gland seal regulator
Item 21 Main steam line gaskets
Item 22 Aux. condensate pump controller - repair kit Item 23 Bow thruster
Item 24 Main circulator pump controller - switch and fuse kit
Item 25 Windlass controller - contractor kit

Part X ABS Survey

ISSUE:

Whether the foreign work performed on the subject vessel 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 the foreign or coastwise trade, or vessels intended to engage in such trade. Section 1466(d)(1) provides for remission of the above duties in those instances where good and sufficient evidence is furnished to show that foreign repairs were compelled by "stress of weather or other casualty" necessary to secure the safety and seaworthiness of the vessel to enable her to reach her port of destination.

The term "casualty", as it is used in the vessel repair statute (19 U.S.C. 1466) has been interpreted by the Customs Court as something which, like stress of weather, comes with unexpected force or violence, such as a fire, explosion, or collision (see Dollar Steamship Lines, Inc., v. United States, 5 Cust. Ct. 28-29, C.D. 362 (1940)). It should be noted that absent specific evidence to the contrary, we consider foreign repairs to have been necessitated by normal wear and tear, a result which does not permit remission (see C.S.D. 79-32). In its application of section 1466, Customs has held that modifications/alterations/additions to the hull and fittings of a vessel are not subject to vessel repair duties. A leading case in the interpretation and application of section 1466 is United States v. Admiral Oriental Line et al., T.D. 44359 (1930) where the court considered the issue of whether steel swimming tanks installed on a U.S.-flag vessel in a foreign port constituted equipment or repairs within the meaning of section 1466. In holding that the installation of these tanks did not constitute either equipment or repairs and therefore was not dutiable, the court in Admiral Oriental cited earlier court decisions which define equipment, promulgations by the Board of Naval Construction, and regulations of the Treasury Department, as well as opinions of the Attorney General.

Accordingly, 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. Admiral Oriental, supra. (quoting T.D. 34150 (1914))

By defining what articles are considered to be equipment, the authority cited above formulated criteria which distinguish those items deemed to be modifications/alterations/additions to the hull and fittings and therefore not dutiable under section 1466. These items include:

...those applications which are permanently attached to the vessel, and which would remain on board were the vessel to be laid up for a long period...Admiral Oriental, supra. (quoting 27 Op. Atty. Gen. 228)

Furthermore, the court in Otte v. United States, T.D. 36489 (1916), stated that before an item can be regarded as part of a vessel, it must be "essential to the successful operation" of the vessel.

Section 4.14(b)(2), Customs Regulations (19 CFR 4.14(b)(2)) provides, in pertinent part, that entry shall be filed with the appropriate Customs officer within five working days after the vessel's arrival. Although the original entry, dated August 4, 1988, appeared to be timely filed, it nonetheless was incomplete

(i.e., not all foreign work was declared). Notwithstanding the intervening meetings and correspondence (including the additional 45-day time period the New York VRLU apparently permitted to obtain single entry bonds), the Customs Regulations make no provision for "amended" entries.

Furthermore, pursuant to section 4.14(d)(1)(ii), Customs Regulations, the application for relief, with supporting evidence, shall be filed within 60 days from the date of first arrival of the vessel, unless Customs grants an extension. Applications for relief are to be submitted for each vessel repair entry for which relief is sought. The application under consideration was filed more than three months from the date of first arrival of the S.S. EXPORT FREEDOM. Furthermore, it was incomplete inasmuch as subsequent documentation submitted indicated various items not declared for which relief was sought.

Although an application for relief need not be in any particular form, pursuant to section 4.14(d)(1)(i), Customs Regulations, it should allege that an item or a repair expense is not subject to duty under either paragraph (a) of section 4.14 (items that are not subject to duty) and/or paragraph (c) (circumstances allowing remission of duty otherwise due). The applicant should be informed that absent Customs authorized extensions of time, failure to submit a timely application for relief and supporting documentation for each individual entry for which relief is sought will result in the entry being forwarded for immediate liquidation.

The applicant should be informed for future reference that in light of the Court's holding in Penrod Drilling Co. v. United States, (Slip Op. 89-168, dated December 13, 1989) anything less than strict adherence to the time requirements set forth in section 4.14 will result in the issuance of penalties for untimely filing. In view of the apparent assurances/extensions of time given by officials of the New York VRLU during correspondence, we recommend no penalty action be taken regarding this particular entry. Notwithstanding the procedural deficiencies noted above, our determinations regarding the dutiable status of the work included on the subject entry are set forth below.

The applicant contends that repairs to the starboard side shell plating were necessitated as a result of a "casualty" occurrence and therefore the cost of such repairs should be remitted pursuant to section 1466(d)(1). Upon reviewing the ABS report No. MT 1545, dated April 10, 1988, we note damage was sustained on November 21, 1987, while the vessel was berthing in loaded condition at pier No. 2 at Norfolk International Terminal, Norfolk, Virginia.

In regard to the above statement, we note that pursuant to Customs ruling VES-13-18-R:CD:C 102707 BJF, dated July 19, 1977, "...for the purpose of 19 U.S.C. 1466, a voyage begins when a ship, having departed a port, is passing upon the seas to another port or to several ports." This holding is premised upon judicial precedent in conjunction with the general interpretation of section 3114, Revised Statutes (19 U.S.C. 1466(a) that "the section is to be construed so as to give as much protection as possible against the competition of foreign labor." (see 33 Op. Atty. Gen. 432)

Accordingly, it is apparent that the subject vessel had not yet "departed a port" or "passed upon the seas" when vessel came in contact with pier No. 2 at Norfolk. Therefore, the vessel was not "compelled, by stress of weather or other casualty, to put into such foreign port" for repairs pursuant to section 1466(d)(1) and relief thereunder is not warranted as to Part IV Accordingly, the cost associated with Part IV - Damage Account is dutiable, except transportation, staging, and temporary lighting.

Pursuant to CD 1836 charges for drydocking, for furnishing electricity, air and water, fees paid for the use of tugs and pilots in drydocking and undocking a vessel, and crane expenses are not dutiable repairs if segregated on the invoice.

The subject vessel underwent various work performed while in drydock in Malta. This work is listed on Malta Drydocks Invoice No. 8070. Upon reviewing this invoice it is apparent that the work listed under the headings "Part I General Services, Drydocking, Inspection and Surveys Account" on pages 1, 2, and part of 3 constitute nondutiable drydocking expenses (with the exception of expenses for a gas free certificate which should be apportioned between dutiable and nondutiable work pursuant to C.I.E.'s 1188/60 and 429/61.

During the course of the drydocking operations which took place, the applicant claims that two major modifications to the vessel were under taken. The vessel's Nos. 2, 3, and 4 port and starboard double bottom ballast tanks were grit blasted and coated with preservatives, and revised hatch dog securing arrangements were installed.

The documentation presented regarding the above hatch dog arrangement substantiates the applicant's claim that this work constituted a modification. Accordingly, the repair cost associated with the work done in Item 76 - Hatch Dog Modifications is nondutiable.

The documentation presented regarding the double bottom ballast tanks reveals that the tanks were blasted and painted with protective coatings. Painting and protective coatings are dutiable as the work performed on the subject items was in the nature of maintenance to keep or preserve the tanks in good condition. Duty assessed on the cost of repairs which are maintenance in nature may not be remitted (see C.I.E. 1537/60). The cost associated with item 77 Ballast Tank Coating is dutiable.

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). Insofar as inspection and cleaning operations are concerned, Customs has long held the cost of cleaning is not dutiable unless it is performed as part of, in preparation for, or in conjunction with dutiable repairs 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. Pursuant to C.I.E. 919/60 remission of duty assessed on the cost or repairs is not warranted under section 1466 where the repairs are maintenance in nature.

With regard to the remaining items on Malta Invoice No. 8070, on part of page 3, and pages 4-19, our review reveals that cleaning and inspections were done on several items listed in the subject invoice, and cleaning and inspections in preparation for repairs were done on several other items. According we find the following items to be non-dutiable inspection and cleaning operations:

Item 48 General cleaning

Item 70 Deep tank cleaning

With regard to the following items, except for staging, crane and transportation charges, the cleaning operations performed in these items constitute dutiable repairs:

Item 7 Sea Valves

Item 9 Anchor chains

Item 21 Boiler valves

Item 33 L.O. service pump and motor

Item 27 Main air compressor

Item 34 Steering engines - Labor to install of U.S. parts (See Cunningham Marine Hydraulics Co. Inc. Invoice No. 065770 and our explanation on pages 8 and 9 of this ruling.)

Item 64 Main circulator motor

Pursuant to the Customs and Trade Act of 1990 (Pub. L. 101- 382) which amends 19 U.S.C. 1466, the cost of foreign-made parts imported into the United States for consumption and then installed on U.S. vessels abroad is exempt from duty. This amendment adds a new subsection (h), which reads as follows:

(h) The duty imposed by subsection (a) of this section shall not apply to--

(1) the cost of any equipment, or any part of equipment, purchased for, or the repair parts or materials to be used, or the expense of repairs made in a foreign country with respect to, LASH (Lighter
Aboard Ship) barges documented under the laws of the United States and utilized as cargo containers, or

(2) the cost of spare repair parts or materials (other than nets or netting) which the owner or master of the vessel certifies are intended for use aboard a cargo vessel, documented under the laws of the United States and engaged in the foreign or coasting trade, for installation or use on such vessel, as needed, in the United States, at sea, or in a foreign country, but only if duty is paid under appropriate commodity classifications of the Harmonized Tariff
Schedule of the United States upon first entry into the United States of each such spare part purchased in, or imported from, a foreign country.

The cost of foreign labor, however, required for the installation of such parts 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 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.

Customs has not yet formulated a position on whether the duty exclusion stated in the new subsection (h)(2) which is applicable to "... spare repair parts or materials..." should be read to include the cost of vessel equipment; however, it is probable that duty will continue to be assesed on "equipment" as opposed to "parts".

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 Harmonized Tariff Schedules of the United States (HTSUS) for a particular part will take the form of a positive statement which must 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. This evidence of proof of importation and payment of duty must be presented in order to escape duty and any other applicable consequences.

In addition, there must be a 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 an immediate or specific future installation on a company vessel.

After a complete review of the certification and documentation submitted with this entry, we find the evidence insufficient to substantiate the fact of payment of duty under the HTSUS for foreign parts imported into the United States for consumption and then installed abroad. With regard to the U.S. parts produced or manufactured in the U.S., only the cost of the labor is dutiable, provided that the evidence verifies not only U.S. purchase, but U.S. origin of that part. Accordingly, the repair cost associated with Item 83 - Main Circulator Pump Repairs on Malta Invoice No. 8070 is dutiable, except transportation and crane service.

Transportation cost associated with foreign repairs are non- dutiable expenses; however, pursuant to C.I.E. 1325/58 and C.I.E. 565/55, duties may not be remitted where the invoice does not segregate the dutiable cost from the non-dutiable cost. Accordingly, the cost associated with following items on Malta invoice No. 8070 are dutiable:

Item No. 100 - No. 2. Hatch Vent Cover
Item No. 101 Bilge Suction Line
Item No. 102 - No. 9 D.B. Sounding Lines

With regard to the remaining items on Malta Invoice 8070, all items are dutiable, except for transportation, crane service and staging.

Farrell Lines has submitted documentation in which it is stated that certain items were owned-supplied items furnished to Malta Drydocks. It claims that these items total $71,095.50.

Section 1466(d)(2), provides that the Secretary of the Treasury is authorized to remit or refund such vessel repair duties if the owner or master provides good and sufficient evidence that the repair parts or materials were manufactured or produced in the United States and the labor necessary to make these repairs was performed by residents of the United States, or by members of the regular crew of the vessel. (emphasis added)

Pursuant to C.I.E. 1257/60, "The fact that repair material used in accomplishing repairs is of United States manufacture is irrelevant unless the work is performed by residents of the United States or by regular members of the crew of the vessel within the contemplation of 3115(2), Revised Statutes." (R.S. 3115(2) now appears as 19 U.S.C. 1466(d)(2)).

The record shows that foreign labor was used to install the owner-supplied parts shown on the invoices listed above. The cost of foreign-labor required for the installation of all parts that are installed aboard, irrespective of origin, is dutiable. Uniform treatment will be accorded to parts sent from the United States for use in vessel repairs abroad. The cost of the materials is duty exempt and only the cost of foreign labor necessary to install such parts is subject to duty. Crew member or U.S.-resident labor continues to be free of duty when warranted. Accordingly, we find the cost of the materials listed on the following invoice to be exempt from duty:

Item 1 Coatings and solvents - International Paint Co. Invoice No. 663002

Item 2 Line shaft bearing - purchase of oil - Exxon Co. Invoice 251337

Item 4 Boiler mounts - Eastern Industrial Supply Corp. Invoice No. 70497

Item 5 Main condenser - zinc plates - Eastern Industrial Supply Corp. Invoice No. 72772

Item 6 Main air compressor - Argo International Invoice No. 5207493

Item 7 Main air ejector - butterfly valves Eastern Industrial Supply Corp. Invoice No. 73547

Item 8 L.O. Service pumps - bearings - Frank Tracey Invoice No. 195345

Item 10 Fuel oil service pump - Kerney Marine and Industrial Services, Inc. Invoice No. 2312

Item 11 Boiler cleaning - gaskets - All Reliable Marine Boiler Repairs, Inc. invoice

Item 13 Port and Starboard boiler retubing - Murray Tube Invoice No. 1886 and Bay Refractory Company, Inc. Invoice No. 116-87

Item 14 Main circulator pump S.C. Engineering Co. Invoice No. 7785 and Argo Invoice No. 526214

Item 15 Main engine H.P. bleed line Brady Marine Invoice No. 15268

Item 16 After peak tanks - International Paint Co. Invoice No. 66302

Item 17 General Service pump suction H.S. White Co. Invoice No. 020176

Item 19 Back pressure relief valve - Eastern Industrial Invoice No. 14189

Item 23 Bow thruster - Argo International invoice No. 52592 and 526478

Item 24 Main circulator pump controller - switch and fuse kit Madison Contractor Invoice No. 32332.

With regard to the following items, there is no evidence submitted to show whether these items were purchased in the United States and/or used aboard on the subject vessel:

Item 3 Main turbines - rubber joints -

Item 9 Steering engines - Cunningham Marine Hydraulics Co. Inc. Invoice No. 085770 - This invoice indicates that worked was performed on the item after the vessel had entered the U.S. port.

Item 18 Misc. Deck Repairs

Item 20 Gland seal regulator

Item 21 Main steam line gaskets- Eastern Industrial Invoice No. 14189 - Invoice dated after vessel arrived and unlike other invoices of the same company, there is no notation that these items were shipped aboard.

Item 22 Aux. condensate pump controller - repair kit - Brown Ross Invoice No. 72510 - invoice indicates that the items listed were shipped on November 29, 1988, subsequent to the vessel's arrival in the U.S. port.

Item 25 Windlass controller - contractor kit - Brown and Ross Invoice No. 74461 - the date of the invoice shows that the item was shipped after the vessel entered the U.S. port.

The entry also includes American Bureau of Shipping (ABS) report Nos. MT1528, MT1528X, MT1529, MT1545 and MT1547 covering various surveys. 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 holdings in C.I.E. 429/61, C.S.D. 79-2, and C.S.D. 79-277.

With regard to the surveys under consideration our findings as to the items listed on ABS Invoice No. 800734 is as follows:

ABS Report MT1545 - the entire amount is dutiable,

ABS Reports MT1528, MT1528X and MT1547 - the entire amounts are nondutiable, and

ABS Report MT1527 - the entire amount is nondutiable with the exception of the cost for "completion of periodical survey of hull No. 3", "repairs and modification of cargo holds hatch covers", repairs to buttweld on starboard box girder", "hull repairs", "completion of special periodical survey of machinery and electrical equipment", "starboard boiler survey and repairs", and "port boiler survey and repairs".

The applicant lists various additional expenses. In regard to those expenses we find the following.

Attachment 5 - Electrocatalytic Ltd. Invoice No. E 2668, except for the engineers rate, all items are nondutiable;

Attachment 6 - Rom Yam Ltd. Invoice No. 0772. - Repairs which are completely ineffective and of no value to the vessel are not repairs dutiable under section 3114, R.S. T.D. 55193(24). The evidence submitted is insufficient to show that the repairs made at Malta to the subject item are ineffective repairs. Accordingly, the repairs listed on Invoice No. 0772 are dutiable.

Attachment 7 - Alhoutyam Ltd. Invoice No. 13980 - all items of cost are nondutiable. Pursuant to CD 1830 testing to see if repairs are necessary are dutiable as part of repairs, if no repairs are made the testing cost is free. Our review of the invoice reveals that no repairs were made. The radar was examined to determine why the picture varied in quality during use at sea.

Attachment 8 - Rom Yam Ltd. Invoice No. 0745 - all items of cost are dutiable.

Following a thorough review of the law and analysis of the evidence, we recommend that the application be granted with the exception of the items enumerated above.

HOLDING:

The foreign work for which the applicant seeks relief is dutiable under 19 U.S.C. 1466 with the exception of those items noted above.

Sincerely,

B. James Fritz
Chief

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