HQ 0111331 - Vessel repair; Modification; U.S. materials; Consumable supplies; Petition for review; Entry No. 424-0010068-3; Port of arrival, New Orleans, Louisiana, August 20, 1989 - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1992 HQ Rulings > HQ 0111117 - HQ 0111331 > HQ 0111331

HQ 111331

June 22, 1991

VES-13-18-CO:R:IT:C 111331 LLB

CATEGORY: CARRIER

Deputy Assistant Regional Commissioner
Commercial Operations Division
423 Canal Street
New Orleans, Louisiana 70130-2341

RE: Vessel repair; Modification; U.S. materials; Consumable supplies; Petition for review; Entry No. 424-0010068-3; Port of arrival, New Orleans, Louisiana, August 20, 1989

Dear Sir:

This is in response to your memorandum of October 3, 1990, which forwards for our determination a Petition for Review filed by counsel on behalf of Sonat Offshore Drilling, Inc., owner of the drilling rig SONAT GEORGE RICHARDSON. The submission appeals the findings in Customs Ruling Letter 110825 of May 10, 1990, relating to the above-captioned vessel repair entry.

FACTS:

Upon delivery as a new vessel constructed by Daewoo Shipbuilding of Korea, the vessel was that same day (October 14, 1988) documented under the laws of the United States. The next day, the non-self-propelled drilling rig began a voyage under tow to the Gulf of Oman.

Numerous operations were performed upon the vessel while aborad, and an Application for Relief from vessel repair duty was filed which made two basic claims, one related to vessel modification and the other to the installation of U.S.-made parts and materials with the use of U.S. labor.

The present submission expands the scope of the appeal for relief. Now before us are claims relating to purchases made prior to documentation, modifications, U.S.-made parts, warranty items, and freight charges and consumables.

ISSUE:

Whether the new evidence presented substantiates the claims made regarding pre-documentation purchases, modifications, U.S. parts purchases, warranty repairs, and freight/consumable charges.

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 question exists as to whether certain of the items under consideration are subject to duty under section 1466 as equipment, or whether they might be considered non-dutiable modifications. In its application of the vessel repair statute, Customs has held that modifications/alterations/additions to the hull and fittings of a vessel are not subject to vessel repair duties.

Over the course of years, the identification of modification processes has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a modification which is not subject to duty, the following elements may be considered:

1. Whether there is a permanent incorporation into the hull or superstructure of a vessel (see United States v. Admiral Oriental Line et al., T.D. 44359 (1930), either in a structural sense or as demonstrated by the means of attachment so as to be indicative of the intent to be permanently incorporated. This element should not be given undue weight in view of the fact that vessel components must be welded or otherwise "permanently attached" to the ship as a result of constant pitching and rolling. In addition, some items, the cost of which is clearly dutiable, interact with other vessel components resulting in the need, possibly for that purpose alone, for a fixed and stable juxtaposition of vessel parts. It follows that a "permanent attachment" takes place that does not necessarily involve a modification to the hull and fittings.

2. Whether in all likelihood, an item under consideration would remain aboard a vessel during an extended layup.

3. Whether, if not a first time installation, an item under consideration replaces a current part, fitting or structure which is not in good working order.

4. Whether an item under consideration provides an improvement or enhancement in operation or efficiency of the vessel.

For purposes of section 1466, dutiable equipment has been defined to include:

...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)).

In the case of Sea-Land Service, Inc. v. United States, 683 F. Supp. 1404 (1988), the Court addressed whether repair work performed on a newly constructed vessel subsequent to its delivery to the owner might be considered to be part of the new construction contract. Simply put, the Court considered whether "completion of construction" is a viable concept so as to render the duty provisions of 19 U.S.C. 1466(a) inapplicable if proven. The Court found completion of new construction to be a valid concept, subject to specific conditions, which are:

1. "All work done and equipment added [must be] pursuant to the original specifications of the contract for the construction of the vessel ...."

2. "This basic standard is limited to work and equipment provided within a reasonable period of time after delivery of the vessel."

Upon reviewing the case on remand from the Court, Customs found that the court-ordered criteria had been satisfied and that the "reasonable period of time" for the warranty period was the one-year period specified in the contract. We have since held likewise in similar cases, and have adopted the one-year limit as the benchmark for honoring new construction warranties which otherwise qualify.

On August 20, 1990, the President signed into law the Customs and Trade Act of 1990 (Pub. L. 101-382), section 484E of which amends the vessel repair statute by adding a new subsection (h). Subsection (h) has two elements, which are 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 nettings) 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 effective date of the amendment is stated as follows:

Effective Date.--The amendment made by this section shall apply to--

(1) any entry made before the date of enactment of this Act that is not liquidated on the date of enactment of this Act, and (2) any entry made--
(A) on or after the date of enactment of this Act, and
(B) on or before December 31, 1992.

Subsection (d)(2) of section 1466 provides that:

(d) If the owner or master of such vessel furnishes good and sufficient evidence that...

(2) such equipments or parts thereof or repair parts or materials, were manufactured or produced in the United States, and the labor necessary to install such equipments or to make such repairs was performed by residents of the United States, or by members of the regular crew of such vessel...
then the Secretary of the Treasury is authorized to remit or refund such duties...

Customs has in the past linked this duty remission provision to the duty assessment provision in subsection (a) of the statute. We have held that a two-part test must be met in order for remission of duty to be granted: first, that the article must be of U.S. manufacture; and, second, it must be installed by U.S.-resident or regular vessel crew labor. The reason for this position is that (d)(2) refers to "such equipments or parts...", etc., without any logical association for the word "such" occurring in that subsection. We inferred that "such" articles must refer to those installed under subsection (a), absent any other reasonable predication. The new amendment puts this issue to rest by making it clear that as concerns foreign-made parts imported for consumption and then installed on U.S. vessels abroad, the labor required for their installation is separately dutiable. A part may now be considered exempt from vessel repair duty albeit the foreign labor cost is dutiable.

In all cases which meet the conditions imposed by the statutory amendment, uniform treatment will be accorded to parts sent from the United States for use in vessel repairs abroad. This will be so regardless of whether they are proven to have been produced in the U.S., or 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, in cases which qualify under the new law.

Customs has held that work performed aboard a vessel in a foreign shipyard prior to its documentation under United States law may be subject to duty under the vessel repair statute. The circumstances surrounding its eventual documentation will demonstrate whether it was "intended to be employed" in either the foreign or coastwise trade at the time that foreign shipyard work was performed. In this case, since vessel delivery and vessel documentation occurred simultaneously, duty applies.

"Consumable Supplies" are generally defined as supplies for the consumption, sustenance, and medical needs of the crew and passengers during the voyage. H.E. Warner, Trustee v. United States, 28 CCPA 143, and Customs Memorandum 107323 of May 21, 1985. Consumable supplies generally are not subject to vessel repair duty, unless used in effecting dutiable repairs (C.I.E. 196/60). Likewise, the expense of transporting materials and parts (freight charges) to foreign repair sites has long been held to be non-dutiable, regardless of whether the operation accomplished with the use of the transported articles is dutiable.

In applying the law and precedents previously discussed to the particular facts of this matter, we have reached certain conclusions, which are as follows:

Warranty Claims

None of the claims made on the basis of the existence of a valid warranty are sustainable. Although all operations were performed on the vessel within one year of its delivery from the vendor to the operator, there is no showing, other than bald unsupported claims, that the operator was reimbursed by the builder for the operations performed. Since the work reported is shown to have been performed by unrelated repair facilities, with payment having been made by the owner, some showing of acknowledgement of liability for payment on the part of the original builder is necessary. Since such is not evident, the warranty claims must be denied.

Pre-Documentation Purchase Claims

The record shows that the vessel was issued a Certificate of Documentation on October 14, 1988. Taking this fact into account, and after reviewing the documentary evidence, we find that the claims made under this theory are not supported by the evidence.

United States-Made Materials

Since the vessel in this case is not a cargo vessel, it may not benefit from the enactment of section 1466(h), the spare parts provision. As such, the purchase of parts and materials is governed by the pre-existing and long-standing precedents of the Customs Service. Taking these rules in consideration, we find that the claims made in this case are all supported by the evidence, with the following exceptions:

Items 28k, 28o, 29, and 51. There is no proof in the file that these items were manufactured in the United States.

Modifications to the Hull and Fittings

After reviewing the evidence presented, we find that the claims of duty-free modification or alteration are sustained, with the following exceptions:

Items 9, 10, 11, 12, 13, 14-20, 23, and 24-27. It is claimed that these items, while not themselves modifications, were purchased for the purpose of working on modifications. There is no evidence that these purchases were made to assist in non-dutiable modification work only, and were not used to assist in completing dutiable operations as well. As such, claims made covering these items must be denied.

Freight Charges and Consumable Supplies

After reviewing the evidence presented, we find that the claims made regarding freight and consumables are sustained, with the following exception:

Item 41. Rust remover, for use prior to painting, is a repair/maintenance-related item which is dutiable.

HOLDING:

Following a thorough review of the facts and evidence, and after an analysis of the law and applicable precedent decisions, we have determined to partially allow and partially deny the Petition for Review, as specified in the law and analysis portion of this decision.

Sincerely,

Stuart P. Seidel

Previous Ruling Next Ruling