HQ 0110980 - Tacoma Vessel Repair Entry No. 906-1514163-8 dated December 3, 1989, M.S. WESTWARD VENTURE. Application; casualty; modifications; vessel repairs performed in Canada; owner-supplied parts; Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647); Customs and Trade Act of 1990 (Pub. L. 101-382); 19 U.S.C. 1466; 19 CFR 4.14 - United States International Trade Commision Rulings

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HQ 110980

April 16, 1991

VES-13-18-CO:R:IT:C 110980 BEW

CATEGORY: CARRIER

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

RE: Tacoma Vessel Repair Entry No. 906-1514163-8 dated December 3, 1989, M.S. WESTWARD VENTURE. Application; casualty; modifications; vessel repairs performed in Canada; owner-supplied parts; Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647); Customs and Trade Act of 1990 (Pub. L. 101-382); 19 U.S.C. 1466; 19 CFR 4.14

Dear Sir:

FACTS:

The record shows that the shipyard work in question was performed on the subject vessel in Victoria, B.C., during the period of November 22, through December 3, 1989. The subject vessel arrived in the United States at the port of Tacoma, Washington, on December 3, 1989.

The entire vessel repair entry involves a potential duty of $229,279.95.

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.

You have requested our advice concerning the following repairs which relate to modifications/alterations/additions.

Item Nos. Description

00001-0034 rudder bearings
00001-0043 soot blowing system
00001-0058 deck drain
00001-0067 reefer cable deck
00001-0069 rotary air compressor
00001-0071 rudder bearings
00004-0001 boiler tubes
00005-0001 life raft

00005-0003-0015 misc. items
00006-0001 sleeve
00008-0001 generator tubes
00010-0001 & 0002 bearings
00011-0001 Henz Service-material
00012-0001 Chemical Cerami - tech
00013-0001 paint
00014-0001 paint
00015-0001 paint
00016-0001 paint
00018-0001 labor

The applicant claims that all of the above items are modifications/alterations/additions to the hull and fittings of the vessel.

ISSUES:

1. Whether certain work performed in a foreign country constitutes modifications/alterations/additions to the hull and fittings rather than equipment purchases or repairs within the meaning of 19 U.S.C. 1466?

2. Whether sufficient evidence is presented to establish that the subject repairs were necessitated by a "casualty" which is remissible under the vessel repair statute (19 U.S.C. 1466).

3. Whether sufficient evidence is presented to establish that parts used in the repair of the Engine Cylinder Liner are owner-supplied spare parts which are free under the vessel repair statute (19 U.S.C. 1466(h)).

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 documented under the laws of the United States to engage in the foreign or coastwise trade, or vessels intended to be employed in such trade.

Paragraph (1), subsection (d) of section 1466 provides that duty may also be remitted if good and sufficient evidence is furnished establishing that the vessel was compelled by stress of weather or other casualty to put into a foreign port to make repairs to secure the safety and seaworthiness of the vessel to enable her to reach her port of destination.

The statute thus sets a three-part test which must be met in order to qualify for remission under the subsection, these being:

1. The establishment of a casualty occurrence.

2. The establishment of unsafe and unseaworthy conditions.

3. The inability to reach the port of destination without obtaining foreign repairs.

The term "casualty" as it is used in the statute, has been interpreted as something which, like stress of weather, comes with unexpected force or violence, such as fire, explosion, or collision (Dollar Steamship Lines, Inc. v. United States, 5 Cust. Ct. 28-29, C.D. 362 (1940)). In this sense, a "casualty" arises from an identifiable event of some sort. In the absence of evidence of such a casualty event, we must consider the repair to have been necessitated by normal wear and tear (ruling letter 106159, September 8, 1983).

The applicant contends that the damage to the lower rudder bearing and rudder, which caused an emergency diversion and drydocking was clearly such a casualty. It states that it is possible the some of the damage may have resulted from an earlier grounding, that the damage to the rudder bearing did not become apparent until much later. To substantiate its claims, the applicant states the following:

Customs has long held that damage to underwater parts of vessels "is usually not easily detectable or susceptible of definite proof respecting the date and place of occurrence" C.I.E. 1202/59, August 20, 1959. Thus relief under 1466(d) is warranted even in the absence of testimony showing that the vessel was grounded, hit a submerged object or otherwise had a casualty causing damage to an area not readily capable of discovery or inspection. See Ves-13-18-CO::R:CD:C 105674 LLB, July 19, 1982; Ves-13-18-CO:R:CD:C 107993 GV.

The applicant has submitted documentation which shows that the spade rudder and propeller was damaged due to a grounding. The American Bureau of Shipping (ABS) report No. VA10504 indicated that the damage occurred in consequence of the vessel grounding when moving astern departing Anchorage, Alaska, on July 10, 1989. It states that the damage to the rudder bearing was of the nature which is impossible to occur as the result of ordinary wear and tear.

The problems associated with detection are aggravated by the fact that the apparatus in question is below the water line. Having encountered this questions previously, Customs has ruled:

Experience demonstrates damage to underwater parts of vessels, including propellers, is usually not easily detectable or susceptible of definite proof respecting the date and place of occurrence. Therefore, relief under section [1466] is granted in the absence of testimony showing that the vessel concerned was grounded, struck bottom, or her propeller contacted some floating object capable of causing damage, prior to the commencement of the voyage (C.I.E. 1202/59,) August 20, 1959.

Pursuant to C.I.E. 1202/59, relief is warranted for such damages in absence of evidence showing that the vessel concerned was grounded, struck bottom, or her propeller contacted some floating object capable of causing damage prior to the commence of the voyage. This position was upheld in both of the above stated rulings (107993 GV and 105674 LLB). It is evident that this damage resulted from an earlier grounding when the vessel was moving astern departing Anchorage, Alaska, on July 10, 1989, therefore relief is not warranted under C.I.E. 1202/59.

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 the vessel suffered damage to the vessel's lower rudder bearing and rudder while in the port of Anchorage. 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 item No. 00001-0034 rudder bearings. Accordingly, the cost associated with this repair is dutiable.

A leading case in the interpretation and application of 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 1466.
The Court in Admiral Oriental, supra., cited with approval an opinion of the Attorney General (27 Op. Atty. Gen 228). That opinion interpreted 17 of the Act of June 26, 1884 (23 Stat. 57), which allowed drawback on vessels built in the United States 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 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.

Under long-standing and consistently applied administrative policy, an installation, even one of a permanent nature, is considered to be a dutiable repair rather than a modification if the installation addresses a repair need. Thus, if an area of a vessel is enhanced by the replacement of one permanent installation with another, the operation is considered dutiable if evidence reveals that a defect or wastage was present in the former installation, which condition was cured by replacement.

In the present case, the applicant claims that the installation of the following:

Item Nos.

00001-0043 soot blowing system
00001-0058 deck drain
00001-0067 reefer cable deck
00001-0069 rotary air compressor
00001-0071 rudder bearings
is a design and operational improvement over the old one. It is claimed that these items were not found to be damaged at the time they were replaced and that the permanent installation of the subject items is to improve the efficiency of the vessel's operation and should be properly considered a non-dutiable modification.

Examination of the entire record, and additional documentation submitted with the application, including that portion of the invoice relating to the said items, reveals that these items were installed to enhance the operation of the vessel's efficiency and are permanent installations to the vessel's hull and fittings. Accordingly, the said items are non- dutiable.

With regard to the items of cost relating to these items which are alleged to be U.S. owner-supplied parts, we have found that the Customs administration of duty assessment issues under section 1466 regarding U.S.-made materials purchased in the U.S. had for some time been guided by the terms of Treasury Decision 75-257 (T.D. 75-257). That decision provides that when materials of U.S.-manufacture are purchased by the vessel owner in the U.S. for installation abroad by foreign labor, the labor cost alone is subject to duty under section 1466. When those same materials are purchased by the owner overseas or purchased in the U.S. by parties other than the owner, the cost of the materials themselves (even though of U.S.-manufacture) was also subject to vessel repair duty.

The climate with regard to parts shipped abroad from the United States for foreign installation was transformed on August 20, 1990, when the President signed Public Law 101-382 which added a new subsection (h) to section 1466. While this provision applies by its terms only to foreign-made imported parts, there is ample reason to extend its effect to U.S.-made materials as well. To fail to do so would act to discourage the use of U.S.-made materials in effecting foreign repairs since continued linkage of remission provisions of subsection (d)(2) with the assessment provisions of subsection (a) of section 1466 would obligate operators to pay duty on such materials unless they were installed by crew or resident labor. If an article is claimed to be of U.S. manufacture, there must be proof of its origin in the form of a bill of sale or domestic invoice. If an article is claimed to have been previously entered for consumption, duty paid by the vessel operator, there must be proof of this fact in the form of a reference to the consumption entry number for that previous importation, as well as to the U.S. port of importation. If imported articles are purchased from third parties in the United States, a domestic bill of sale to the vessel operator must be presented. Further, with regard to imported articles, there must be presented a certification from the owner or master that the vessel at issue is a cargo vessel and that the imported articles were purchased for installation aboard the company's vessels.

If the elements stated above are proven to the satisfaction of Customs, the cost of foreign labor utilized for installation of U.S.-made or previously imported articles will be subject to duty under section 1466 in matters concerning repairs, and only the cost of qualifying materials used in repairs will be free of duty. Modifications will of course continue to be treated as duty-free, both materials and labor.

Since the applicant has not submitted the above stated evidence to sustain that either duty has been paid on or that certain other owner-supplied parts are of U.S. origin, the cost of the owner supplied parts is dutiable. The application is denied as to the following items.

Item Nos.

00004-0001 boiler tubes
00005-0001 life raft
00005-0003-0015 misc. items
00006-0001 sleeve
00008-0001 generator tubes
00010-0001 & 0002 bearings
00011-0001 Henz Service-material
00012-0001 Chemical Cerami - tech
00013-0001 paint
00014-0001 paint
00015-0001 paint
00016-0001 paint
00018-0001 labor

If, prior to liquidation, the proper certification and/or proof of prior importation is presented, the said items considered under section 1466(h) may be considered free of duty.

HOLDING:

1. The evidence presented is not sufficient to prove that the foreign repairs performed on the subject vessel were necessitated by a casualty occurrence, thus warranting remission pursuant to 19 U.S.C. 1466. The application is denied as to the casualty.

2. The installation of Item Nos. 00001-0043, 00001-0058, 00001-0067, 00001-0069, and 00001-0071 constitutes modifications/ alterations/additions to the hull and fittings rather than repairs. As such, the cost of this work in not dutiable under 19 U.S.C. 1466.

3. Since the applicant has not submitted the above stated evidence to sustain that either duty has been paid on or that certain other owner-supplied parts are of U.S. origin, the cost of the owner supplied parts is dutiable. The application is denied as to these items. If, prior to liquidation, the proper certification and/or proof of prior importation is presented, the said items considered under section 1466(h) may be considered free of duty.

Sincerely,

B. James Fritz

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