HQ 0110884 - Protest No. 270489-003984, PRESIDENT KENNEDY V-9 - United States International Trade Commision Rulings

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HQ 110884

July 13, 1990

VES-13-18-CO:R:P:C 110884 KVS

Category: CARRIER

Chief, Technical Branch
Pacific Region
1 World Trade Center
Suite 705
Long Beach, CA 90831

RE: Protest No. 270489-003984, PRESIDENT KENNEDY V-9

Dear Sir:

Your memorandum dated February 26, 1990, forwarded a protest regarding vessel repair entry no. C27-0075224-2. Our findings are set forth below.

FACTS:

The PRESIDENT KENNEDY is one of three C-10 or "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 Howaldstwerke-Deutsche Werft AG (HDW) in Kiel, West Germany. The subject vessel was delivered to APL on July 15, 1988, and had work performed shortly thereafter in foreign shipyards. Specifically, the main engine access gratings and ladders were fabricated, repair kits were provided for four indicator cocks that leaked or refused to open, and a new stores box guide rail was installed to prevent damage to the ship's fittings. Subsequent to the completion of the aforementioned work, the subject vessel arrived in the United States at San Pedro, California, on May 27, 1989.

A vessel repair entry covering the voyage in question was filed on May 27, 1989. APL's letter of December 7, 1989, incorporates by reference 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, which advances the arguments 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. In view of the failure to submit an application, the entry was forwarded for liquidation, which took place on September 15, 1989.

A protest (with copies of the invoices and job control forms) was timely filed on December 11, 1989, covering entry no. C27-0075224-2. APL's letter of December 7, 1989, which was attached to the protest, claims that the following items were covered by the warranty clause of the construction contract: Item 1 (JCF no. 8-108, crankcase grating, Omi Engineering Co.), Item 2 (JCF no. 9-156, repair kits, Sulzer Brothers of Japan), and Item 4 (JCF no. 8-111 Hongkong United Dockyards, Ltd.). Also attached to the protest is the letter dated December 13, 1988, which was submitted in connection with other APL protests also based upon warranty.

In letters to Mr. Weeks dated July 17, 1989, and August 9, 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 November 7, 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 a particular item in question was covered by the warranty but that the entire cost was reimbursed.

By letters dated November 2, 1989 and November 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. 37 (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 Services, Inc. v. United States, 638 F. Suppl 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 of the original contract, when the work was actually performed, and the nature and ourpose 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 is dutiable under the foreign repair statute. Id. at 1407.

In the instant case, the work in question was performed shortly after the delivery of the vessel i.e., 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, the protestant has submitted evidence sufficient to substantiate the claim that the work in question (i.e., Item 1, crankcase grating; Item 2, repair kits; and Item 4, stores box guide rail) is non-dutiable 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 non-dutiable.

Accordingly, the protest is granted.

Sincerely,

B. James Fritz

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