HQ 0111036 - Benicia Repair Entry No. C28-0087698 dated February 19, 1990, M/V MARINE RELIANCE. Application; modifications; owner-supplied parts; 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 111036

June 6, 1991

VES-13-18-CO:R:IT:C 111036 BEW

CATEGORY: CARRIER

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

RE: Benicia Repair Entry No. C28-0087698 dated February 19, 1990, M/V MARINE RELIANCE. Application; modifications; owner-supplied parts; 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 at the Sumitomo Heavy Industries, Ltd, Oppama shipyard, in Yokosuka, Japan, during the period of January 22 through 30, 1990. The subject vessel arrived in the United States at the port of Benicia, on February 19, 1990.

The entire vessel repair entry involves a potential duty of $115,903.35.

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 No. Description

16-12 lube oil tank
16-13a Pipe and valves, bottom blow
16-13b Pipe and valves, surface blow
16-13c Pipe and valves, sludge-line
15-4 {Parts acquired at
16-2, 6, & 8 {time of
17-3 [contract (1987)

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?

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.

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.

16-12 lube oil tank
16-13-a Pipe valves, bottom blow
16-13b Pipe and valves, surface blow
16-13c Pipe and valves, sludge-line
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.

15-4 {Parts acquired at
16-2, 6, & 8 {time of
17-3 {contract (1987)

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 installation of Item Nos. 16-12, 16-13-a, 16-13-b, and 16-13-d 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.

2. 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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