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HQ 110905


July 20, 1990

VES-13-18-CO:R:P:C 110905 KVS

CATEGORY: CARRIER

Chief, Technical Branch
Commercial Operations Division
1 World Trade Center
Long Beach, CA 90831

RE: Warranty; original construction
Vessel: PRESIDENT POLK V-7
Vessel Repair Entry No. C27-0012588-6
Protest No. 27049-002307

Dear Sir:

This is in response to your memorandum of February 26, 1990, which forwards for our consideration protest no. 27049-002307, filed in connection with the PRESIDENT POLK V-7, vessel repair entry no. C27-0012588-6. Our findings are set forth below.

FACTS:

The PRESIDENT POLK is one of two C-10 or "non-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 Bremer Vulkan AG (BV) in Bremen, Germany. The subject vessel was delivered to APL on July 17, 1988. In March, 1989, the vessel underwent foreign shipyard operations. Specifically, repair kits were provided for leaking main engine cylinder indicator valves, aluminum gratings for the main engine scaffolding was provided, a leaking air cooler was repaired, two missing trap doors and handrail drop bars on the lashing bridge were provided, the servo-gear train for the combustion control system was replaced, and the end caps for both the No. 2 and No. 3 diesel generator fuel supply headers were re-welded. Subsequent to the completion of the aforementioned work, the subject vessel arrived in the United States at San Pedro, California, on March 27, 1989, and made entry.

In a letter dated December 13, 1988, from the Marine Customs Coordinator at APL, to the Chief of the Liquidation Branch in San Francisco, it was stated that certain foreign work performed on the PRESIDENT POLK 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 for relief, the entry was forwarded for liquidation which took place on June 2, 1989.

A protest (with copies of several invoices and job control forms) was timely filed on June 28, 1989, in conjunction with vessel repair entry C27-0012588-6 claiming that the following items were covered by the warranty clause of the construction contract: Item 1 (JCF no. 7-143, repair kits), Item 2 (JCF no. 1-236, aluminum gratings), Item 3 (JCF no. 7-146, air cooler repairs), Item 6 (JCF no. 7-142, trap door and railing repair), Item 7 (JCF no. 7-157, servo-gear train replacement), Item 8 (JCF no. 7-139, end cap welding for No.2 diesel generator fuel supply header) and Item 9 (JCF no. 7-147, end cap welding for No. 3 diesel generator fuel supply header).

We note, however, that of the items listed above that are claimed to be duty-free, invoices were not submitted as to the following items: Item 1 (JCF no. 7-143, repair kits), and Item 3 (JCF no. 7-146, air cooler repairs).

In letters to Mr. Weeks, dated July 17 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 the requested evidence must indicate not only that a particular item in question was covered by the warranty but that the entire cost was reimbursed.

By letters dated November 2 and 6, 1989, APL provided the additional documentation in support of duty-free treatment of certain identified warranty items for the PRESIDENTS KENNEDY, JACKSON, AND TRUMAN. As to the PRESIDENTS ADAMS and POLK, however, APL requested an extension of time until March 30, 1990, within which to submit additional documentation to support a finding of duty-free status for warranty items which were still under deliberation with BV. In response to a letter from APL dated March 29, 1990, which requested an extension of time until June 30, 1990, to submit the requisite documentation, Customs, by letter of April 4, 1990, denied any additional extension of time. In the alternative, APL, by letter of May 4, 1990, proposed a shorter extension until May 30, 1990, and agreed that no further extension would be sought. Customs granted this latter request in a letter to APL dated May 10, 1990.

By letters dated May 22 and May 25, 1990, APL provided the following additional documentation in support of duty-free treatment of certain identified warranty items: affidavits from the Head of the Guarantee Department, BV, 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; and a letter signed by an official of BV enclosing a guarantee settlement agreement signed by officials of both APL and BV, and referencing the above affidavits and a wire transfer for the amount in question.

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(a) provides, in pertinent part, for payment of duty in the amount of 50 percent ad valorem on the cost of foreign repairs to vessels engaged, intended to engage, or documented under the laws of the United States to engage in the foreign or coastwise 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. 937 (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 Service v. United States, 638 F.Supp. 1404 (CIT, 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 nature of the guarantee or warranty clause (under the terms of the original contract), when the work was actually performed, and the nature and purpose 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 be properly 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 construction of the vessel. Hence, all work performed and equipment added which is not encompassed by the contract are dutiable items under the foreign repair statute. Id. at 1407.

In the instant case, the work in question was performed shortly after delivery of the vessel (i.e., within the one year duration of the warranty), and the yard which constructed the vessel acknowledged coverage of the work under the warranty.

Accordingly, the protestant has submitted evidence sufficient to substantiate its claim that the work for the following items is non-dutiable pursuant to the warranty provisions of the original contract for construction: Items 2, 6, 7, 8, and 9. However, in the absence of cost documentation relating to Items 1 and 3, we find these items to be dutiable.

HOLDING:

The foreign shipyard operations performed on the subject vessel for which the protestant has submitted evidence of cost, coverage under the warranty provisions of the original construction contract and subsequent reimbursement of the expense by the builder is non-dutiable.

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

Sincerely,

Stuart P. Seidel

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