HQ 0111464 - Vessel Repair; Modifications; Spare Parts; NORTHERN HERO; Entry No. C31-0008307-1. - United States International Trade Commision Rulings

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HQ 111464

July 23, 1991

VES-13-18 CO:R:IT:C 111464 JBW

CATEGORY: CARRIER

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

RE: Vessel Repair; Modifications; Spare Parts; NORTHERN HERO; Entry No. C31-0008307-1.

Dear Sir:

This letter is in response to your memorandum of December 27, 1990, which forwards for our review the application for relief filed in conjunction with the above-referenced vessel repair entry.

FACTS:

The record reflects that the subject vessel, the M/V NORTHERN HERO, arrived at the port of Dutch Harbor, Alaska, on June 9, 1990. Vessel repair entry, number C31-0008307-1, was filed on June 15, 1990. The entry indicates that the vessel underwent extensive foreign shipyard work to convert the vessel from an oil rig supply vessel to a stern trawler head and gut fish factory processing vessel. The work included the removal of the superstructure, the lengthening of the vessel, the construction of a new superstructure, the replacement the engine to accommodate a different propulsion system, the installation of a hydraulic system to operate trawl nets, and the installation of freezing and processing areas.

ISSUE:

(1) Whether the work performed to the vessel while in a foreign shipyard constitutes a modification to the vessel and is therefore not subject to duty under 19 U.S.C. 1466.

(2) Whether the costs for parts used in foreign shipyard work are dutiable under 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 fifty 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.

In its application of the vessel repair statute, the Customs Service has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. Over the course of years, the identification of work constituting modifications on the one hand and repairs on the other has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a modification that 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, 18 C.C.P.A. 137 (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.

2. Whether in all likelihood an item under consideration would remain aboard a vessel during an extended lay-up.

3. Whether, if not a first time installation, an item under consideration constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function.

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.

T.D. 34150, 26 Treas. Dec. 183, 184 (1914)(quoted with approval in Admiral Oriental).

In the present case, the applicant claims that certain items contained in the Aizawa Shipping Company invoices, labelled as "new," are non-dutiable modifications. The record shows that the Aizawa Shipping Company managed the conversions, which actually took place at Murakami Shipyards, Ishinomaki, Japan. The Customs Service has held that the decision in each case as to whether an installation constitutes a nondutiable addition to the hull and fittings of the vessel depends to a great extent on the detail and accuracy of the drawings and invoice descriptions of the actual work performed. Even if an article is considered to be part of the hull and fittings of a vessel, the repair of that article, or the replacement of a worn part of the hull and fittings, is subject to vessel repair duties.

In the present case, we find that the Aizawa invoice descriptions do not enable us to determine conclusively that the work performed to the vessel is not dutiable as a modification. The invoices contain only the most general summary of the work carried out by the shipyard. Without details provided by the architectural plans and shipyard invoice descriptions of the work performed, we can only speculate on the actual work carried out. In the absence of such information, we find the costs contained in the Aizawa invoices to be dutiable.

The applicant further seeks relief for certain supplies and materials, contained in the Marco Marine invoices, that the applicant claims were manufactured in the United States or imported into the United States with duty-paid. The vessel repair statute exempts from duty spare repair parts or materials that have been manufactured in the United States or entered the United States duty-paid and are used aboard a cargo vessel engaged in foreign or coasting trade. 19 U.S.C. 1466(h). The Customs Service interprets the use of the term cargo to limit the exception contained in the statute to vessels whose sole service is the transportation of cargo and which are actually engaged in that service while documented for the foreign or coasting trade. Headquarters Ruling Letter 110953, dated September 19, 1990. This interpretation excludes vessels such as factory processors that process, store, and transport as cargo marine products, but does not exclude those bona fide cargo vessels that may incidentally carry that number of passengers allowed under Coast Guard guidelines.

Liability for the entry and payment of duties accrues at the time of first arrival of the vessel in any port of the United States. 19 U.S.C. 1466(a); 19 C.F.R. 4.14(a)(1). The NORTHERN HERO, at the time of arrival, was a fish factory processor and consequently does not qualify for the exceptions contained in 19 U.S.C. 1466.

Failing qualification for the exceptions accorded to cargo vessels, we must evaluate the petitioner's claims regarding duty treatment of parts under the previously established statutory rules. Customs administration of duty assessment issues under section 1466 regarding United States manufactured materials purchased in the United States has been guided by the terms of Treasury Decision 75-257. T.D. 75-257, 9 Cust. B. & Dec. 576 (1975). That decision provides that when materials of United States manufacture are purchased by the vessel owner in the United States for installation abroad by foreign labor, the labor cost alone is subject to duty under 19 U.S.C. 1466. Id.; Headquarters Ruling Letter 111065, dated February 4, 1991. The owner or master must submit written documentation or other physical evidence, such as an affidavit by the equipment manufacturer, that the equipment was manufactured in the United States. See Headquarters Ruling Letter 110953, dated September 19, 1990. Absent such documentation, the material is deemed foreign and consequently is dutiable.

We have reviewed the Marco Marine Company invoices and have determined that the costs for materials, which are contained on the following invoices and which are attested to be of United States origin, are not dutiable:

336191 336956 337084 337111
337227 337283 337363 337503
337532 337641 337649
Marco Order 13998 (items 9 and 10 are dutiable)

The following Marco Marine invoices do not indicate country of origin, and the items appearing on the invoices are dutiable:

338155 338218 338223 338345
339485

Finally, you inquire as to whether the costs for the main propulsion gears contained in the Falk Corporation invoice are dutiable. A letter signed by the Marine Sales Engineer of the Falk Corporation indicates that the parts were manufactured at the company's plant in Milwaukee, Wisconsin. The parts, being of United States origin, are therefore not dutiable.

HOLDING:

The costs contained on the Aizawa Shipping Company invoices for claimed modifications, absent more complete invoice descriptions and architectural drawings of the work performed, are dutiable under 19 U.S.C. 1466.

The vessel does not qualify as a cargo vessel under 19 U.S.C. 1466(h). Consequently, parts used in foreign repairs must be established to be of United States manufacture to be free from vessel repair duties. Our analysis and holdings are set forth in the discussion above.

Sincerely,

B. James Fritz
Chief

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