HQ 0111629 - Protest No. 1801-90-000062; Tampa Vessel Repair Entry No. C18-0005369-1, dated November 9, 1988; GREEN BAY, Voyage 8. U.S. spare parts and owner-supplied spare parts; Customs and Trade Act of 1990; P.L. 101-382; 19 U.S.C. 1466(h); warranty work; duplicate charges. - United States International Trade Commision Rulings

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HQ 111629

January 21, 1992

VES-13-18-CO:R:P:C 111629 BEW

CATEGORY: CARRIER

Deputy Assistant Regional Commissioner
Commercial Operations Division
South Central Region
New Orleans, Louisiana 70130

RE: Protest No. 1801-90-000062; Tampa Vessel Repair Entry No. C18-0005369-1, dated November 9, 1988; GREEN BAY, Voyage 8. U.S. spare parts and owner-supplied spare parts; Customs and Trade Act of 1990; P.L. 101-382; 19 U.S.C. 1466(h); warranty work; duplicate charges.

Dear Sir:

This is in reference to memoranda dated April 4 and 17, 1991, and January 8, 1992, from your office which transmitted protest No. 1801-90-000062, relating to vessel repair entry No. C18-0005369-1, concerning the GREEN BAY, Voyage 8, which arrived at the port of Tampa, Florida, on November 5, 1988.

FACTS:

During the period from September 29 to October 6, 1988, while in Yura, Japan, the vessel GREEN BAY underwent various shipyard operations at the Mitsui Dockyard Co., Ltd., Yura dockyard. By decision dated March 23, 1990, HQ 110558 LLB, we ruled that the Application for Relief was untimely filed. The dutiability of these operations was considered by your office and the entry was liquidated on September 14, 1990. The protest was timely filed on December 5, 1990. Included in your considerations was the matter of whether the spare parts used in the repairs are dutiable under the statute; and whether certain other repairs alleged to be guarantee work and duplicate charges were remissible under the statute.

The following items are the only items which are presently being protested:

A. Spare parts of foreign origin.

B. Guarantee work

C. Duplicate charges

The protestant claims that the subject spare parts should be duty free because section 484E of Public Law 101-382 provides for payment of duty under an appropriate commodity classification of the Harmonized Tariff Schedules of the United States (HSTUS). It further claims that the subject law applies retroactively in cases such as this.

It further claims that the items listed on the "specification of drydocking" dated October 6, 1988, should be classified free because all of the items listed in the document were performed in fulfillment of the Warranty Clause of the shipbuilding contract dated August 1, 1986. It cites the Court of International Trade case of Sea-Land Service, Inc. v. United States, 683 F. Supp. 1404 (1988) as the legal basis for its claim.

Finally, it claims that Customs charged duty twice on item 1-3 listed on Mitsui invoice Y14809. It claims that duty was charged on this item in Mitsui invoice Y14807, and again charged on the same item in Mitsui invoice Y14809. Copies of the relevant pages from the said two invoices have been submitted to substantiate this claim.

The GREEN BAY was delivered to Central Gulf by the shipyard in 1987. The subject guarantee work was performed under a construction contract. The standard contract contained a warranty clause (Article X WARRANTY OF QUALITY), containing two time elements, which read as follows:

1. Guarantee of Materials and Workmanship:

For a period of twelve (12) months after the date of delivery of the Vessel, the Contractor shall guarantee the Vessel, and all of her engines, machinery, parts and equipment, that are manufactured or supplied by the Builder or its subcontractors under this Contract, but excluding the materials, equipment and/or instruments supplied by the Buyer, against all defects which are solely due to defective material and/or poor workmanship by the Builder.

2. Notice of Defects:

The Buyer, or its duly authorized representative(s), shall notify the Builder in writing, or by cable or telex confirmed in writing, as promptly as possible after discovery of any defect for which claim is to be
made under this guarantee. The Buyer's written notice shall include full particulars as to the nature and extent of the defect, but excluding incidental or consequential damages as hereinafter provided.

The Contractor shall have no obligation for any defects discovered prior to the expiry date of the said twelve (12) months period, unless of such defects is received by the Builder not later than thirty (30 days after such expiry date.

The warranty provisions are conditioned upon timely written notice being given by the owner to the shipyard within 30 days following the expiration of the warranty period.

ISSUES:

1. Whether the cost of foreign spare parts or materials which are purchased and installed on the vessel aboard prior the parts or materials being imported into the United States is subject to duty under the vessel repair statute. (19 U.S.C. 1466(h). Whether the statute applies to entries made either before or after the August 20, 1990, date of enactment, so long as those entries have not been finally liquidated.

2. Whether the court-established elements for warranty recognition are present in this case, as detailed in the case of Sea-Land Service, Inc. v. United States, 683 F.Supp. 1404 (1988). Whether sufficient evidence is presented to establish that the certain repairs are "guarantee work" which is remissible under the vessel repair statute (19 U.S.C. 1466).

LAW AND ANALYSIS:

Section 1466 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 foreign or coastwise trade, or vessels intended to engage in such trade.

Pursuant to the Customs and Trade Act of 1990 (Pub. L. 101- 382) which amends 19 U.S.C. 1466, the cost of foreign-made parts imported into the United States for consumption and then installed on U.S. vessels abroad is exempt from duty. This amendment adds a new subsection (h), which reads 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 netting) 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 this amendment makes this section applicable to any entry made before the date of enactment of this Act that is not liquidated on the date of enactment of this Act, and any entry made--

(A) on or after the date of enactment of this Act, and
(B) on or before December 31, 1992.

Since the subject entry was not liquidated until September 14, 1990, a date after the enactment, the new section 1466(h) is applicable to this entry as it relates to spare parts. Based upon the language of these new provisions of law, Customs has ruled that the cost of imported parts and materials upon which duties have previously been paid under the Harmonized Tariff Schedule of the United States will not be subject to duty.

There can be no doubt that the language of section 1466(h) which requires duty payment on spare parts under the Harmonized Tariff Schedule of the United States upon first entry, is directed to the entry of the spare parts, not the entry of a United States-flag vessel. In fact the legislative history (Sen. Rept. 101-252, pp. 37-38), in referring to what is now section 1466(h)(2) provides that "[t]his section is intended to ensure that vessel owners will pay duty on such parts and materials only once, at the time of their first entry into the United States." (emphasis supplied). Further, Senator Breaux, author of the legislation, has indicated his concern that the Customs administration of the vessel repair statute prior to the new legislation limited the ability of vessel operators to reduce costs "...by ordering foreign spare parts for delivery in the United States."

The purpose of section 1466(h)(2) is not to assure the lowest rate of duty possible but rather to ensure that duty will be paid under the Tariff Act of 1930, as amended, only once.

The need for the payment of duty under "...appropriate commodity classifications of the Harmonized Tariff Schedule...", as required by the statute, is initiated at the time a vessel arrives with the limits of a port in the United States with the intent then and there to unlade merchandise. (See section 101.1(h), Customs Regulations (19 CFR 101.1(h)). The special status accorded vessels, their tackle, apparel, equipment, and appurtenances has long been recognized, with vessels being considered sui generis and totally distinct from merchandise. (See The Conqueror, 166 U.S. 110, 17 S. Ct. 510, 41 L. Ed. 937 (1896); United States v. William Herman Wepner, 32 CCPA 30, C.A.D. 282 (1944)). The requirements for the entry of merchandise are provided in section 1484 of title 19, United States Code, wherein exceptions to those requirements are also provided. Among the cited exceptions are those circumstances provided under 19 U.S.C. 1498, subsection (10) of which provides for entries relating to the vessel repair statute.

The result of all of the foregoing is that spare parts and materials of foreign origin were not meant to benefit from nor will they be permitted to benefit from the duty exemption under section 1466(h)(2) unless they are regularly entered as merchandise at the Harmonized Tariff Schedule rates of duty prior to their foreign installation. To hold otherwise would be contrary to the intent of the legislation, and would render meaningless the statutory requirement that a vessel owner or master certify that such imported spare parts and materials are intended for use aboard a qualifying vessel. In addition, such an interpretation would render 1466(a) meaningless with regard to "the repair parts" provision. The rules of statutory construction discourage such a result.

The certification required by 19 U.S.C. 1466(h)(2) as to the vessel's documentation (foreign or coasting trades) and service, will be made by the master on the vessel repair entry (CF 226) at the time of arrival. The fact of payment of duty under the Harmonized Tariff Schedules of the United States (HTSUS) for a particular part will take the form of a positive statement which must identify the port of entry and the consumption entry number for each part installed on the ship which has not previously been entered on a CF 226. This evidence of proof of importation and payment of duty must be presented in order to escape duty and any other applicable consequences.

After a complete review of the documentation submitted with this entry, we find that the subject spare parts were purchased and installed on the vessel during the period from September 5 through October 6, 1988. We further find that the subject spare parts and materials were not imported into the United States and the duty paid under the HTSUS prior to installation on the vessel. Accordingly, the protest is denied as to the subject foreign spare parts.

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."

The contract for construction of the said vessel contained clauses guaranteeing for twelve (12) months any area of the vessel for which the builder accepted responsibility under the contract and specifications, conditioned upon written notification from the owner of any covered defect within the agreed upon 12-month period.

In the Sea-Land case, we found that the court-ordered criteria has 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.

The question now to be addressed is whether the Sea-Land Service, Inc., supra., court-ordered criteria and/or contract requirements have been satisfied in this case.

We note that the repair bill being protested in this case indicates repairs having been effected before the expiration of the one year and thirty-day period specified in the warranty clause of the contract. The fact that repairs were made during the stated period permits us to assume that notification was given to the original vendor by the vessel operator as specified in the contract, so long as we find an invoice from the original vendor stating that work was performed at no charge. If repair work is performed by remote contractors as permitted under the contract, there must be evidence that the builder was notified before repair or that the vessel operator was reimbursed by the original vendor (see Article X of the contract).

In this case, warranty claims are made for two (2) areas listed in the document "Specification of Drydocking" dated october 6, 1988, as follows:

4. Guarantee Items of Deck Department

1. Welding cracks with stop holes and "remaing" of weldment to No. 2 F.O. tank top on air truck at frll7 port/stb'd on car deck No. 11

2. Pilot ladder reels by port/stb'd gangway, renew ball bearings and reconditioned the frames.

3. Galley drains

4. Hinge pins of side ramps

5. Non-slip paint around fixed ramp on car decks remove where damaged or pealing of the paint.

6. Bow thruster

7. Upper and navigation bridge decks outside doors.

8. Exterior doors on upper deck

9. Clothes lockers in quarter

10. Install isolation valve on air line of ship's whistle.

2. Guarantee Items of Engine Department

1. Emergency diesel generator

2. Composit boiler sampling line

3. Waste oil incinerator suction strainer

4. 115V grounds.

5. Replace or Repair scav-exh press, manometer on M.E.

6. Repair leading of relief valve of M.D.O filling line.

7. Potable water tank.

8. Renew inlet and outlet valves to M.E. fuel oil backflush heater due to values leak.

9. Rectify cause of water leaking into insulation and under floor in reefer handling room inb'd bulkhead.

10. Renew door closer aftermost door on port side accom. deck.

11. Rectify cause of dropping head tank level on bow thruster.

12. Renew stud piece from evaporator air ejector to overboard line.

13. Renew gaskets on M.E. Lub. oil return lines to sump tank.

14. Renew 3 way valve for M.E. turbocharger water washing.

These items were performed without cost by the contractor itself. Accordingly, the protest is granted as to the subject items.

HOLDING:

Following a thorough review of the law and analysis of the evidence, the protest is denied as to the spare parts.

Inasmuch as there is evidence that the foreign shipyard operations claimed to be covered by warranty were performed pursuant to the conditions of the warranty clause of the contract for construction, the protest is granted as to the twenty-four (24) items stated in the Specification of Drydocking" dated October 6, 1988.

The protest is granted as to the duplicate charges.

Sincerely,

B. James Fritz

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