HQ 0111691 - Protest No. 2002-90-001858; Vessel Repair Entry No. C20- 0024672-1; OVERSEAS HARRIETTE V-110; Modification; U.S. Parts; Exchange Rate - United States International Trade Commision Rulings

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HQ 111691

December 19, 1991

VES-13-18-CO:R:IT:C 111691 GEV

CATEGORY: CARRIER

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

RE: Protest No. 2002-90-001858; Vessel Repair Entry No. C20- 0024672-1; OVERSEAS HARRIETTE V-110; Modification; U.S. Parts; Exchange Rate

Dear Sir:

This is in response to your memorandum dated May 6, 1991, forwarding a protest regarding vessel repair entry no. C20- 002467-1. Our ruling is set forth below.

FACTS:

The OVERSEAS HARRIETTE is a U.S.-flag vessel owned by Manufacturers Hanover Trust Co., New York, N.Y. The subject vessel underwent foreign shipyard work in Lisbon, Portugal, during the period of August, 1989. Subsequent to the completion of the work the subject vessel arrived in the United States at New Orleans, Louisiana, on September 14, 1989. A vessel repair entry was filed on September 21, 1989.

A request for an extension of time to submit evidence of cost and an application for relief was approved by Customs on November 14, 1989, and the protestant was granted until December 13, 1989, to provide the necessary documentation. An application for relief dated December 20, 1989, with supporting documentation was not received by Customs until December 21, 1989, eight days after the extension expired. In view of the untimeliness of the submission, the application was denied in full on February 20, 1990.

A petition for review of the denial of the application, dated March 13, 1990, was timely filed. By ruling 111022 RAH, dated August 16, 1990, Customs held that a petition for review received after denial of an application for relief due to an
untimely submission may not be considered. Accordingly, the petition was denied, the entry was referred for immediate liquidation, and the vessel operator was informed of the right to file a protest under Part 174, Customs Regulations (19 CFR Part 174). The entry was liquidated on August 22, 1990. The ensuing protest was filed on November 20, 1990. Pursuant to a request from the New Orleans Vessel Repair Liquidation Unit (VRLU), the protestant, by letter dated April 16, 1991, provided additional documentation specifying the particular items under protest.

The following issues are raised in the protest: (1) the installation of an item as a nondutiable modification; (2) the dutiability of various parts sent from the United States for use in vessel repairs abroad; (3) the applicable exchange rate used for converting foreign currency when calculating liquidated a vessel repair entry.

ISSUES:

1. Whether evidence is presented sufficient to prove that the foreign work performed on the subject vessel for which the protestant seeks relief constitutes modifications/alterations/ additions to the vessel so as to render the work nondutiable under 19 U.S.C. 1466.

2. Whether evidence is presented sufficient to prove that various parts were sent from the United States for use in vessel repairs abroad so as render their cost nondutiable under 19 U.S.C. 1466.

3. Whether evidence is presented sufficient to prove that labor used to install parts in a foreign shipyard was done by U.S. residents so as to render the cost of such labor nondutiable under 19 U.S.C. 1466.

4. Whether the exchange rate of 1.8225 used by Customs for converting British pounds in calculating the liquidated foreign vessel repair entry under consideration was the correct rate.

LAW AND ANALYSIS:

Title 19, United States Code, 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.

In its application of the vessel repair statute, Customs has held that modifications 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 lay up.

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

Very often when considering whether an addition to the hull and fittings took place for the purpose of 19 U.S.C. 1466, we have considered the question from the standpoint of whether the work involved the purchase of "equipment" for the vessel. It is not possible to compile a complete list of items that might be aboard a ship that constitute its "equipment". An unavoidable problem in that regard stems from the fact that vessels differ as to their services. What is required equipment on a large passenger vessel might not be required on a fish processing vessel or offshore rig.

"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))

By defining what articles are considered to be equipment, the Court attempted to formulate criteria to distinguish non-
dutiable items which are part of the hull and fittings of a vessel from dutiable equipment, as defined above. These items might be considered to include:

...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... Admiral Oriental, supra., (quoting 27 Op. Atty. Gen. 228).

A more contemporary working definition might be that which is used under certain circumstances by the Coast Guard; it includes a system, accessory, component or appurtenance of a vessel. This would include navigational, radio, safety and, ordinarily, propulsion machinery.

The Customs and Trade Act of 1990 (Pub. L. 101-382) which amends 19 U.S.C. 1466, exempts from duty under the statute, the cost of spare repair parts or materials which have been previously imported into the United States as commodities with applicable duty paid under the Harmonized Tariff Schedule of the United States (HTSUS). The amendment specifies that the owner or master must provide a certification that the materials were imported with the intent that they be installed on a cargo vessel documented for and engaged in the foreign or coasting trade.

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 HTSUS for a particular part must be evidenced as follows. In cases in which the vessel operator or a related party has acted as the importer of foreign materials, or where materials were imported at the request of the vessel operator for later use by the operator, the vessel repair entry will 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. In cases in which the vessel operator has purchased imported materials from a third party in the United States, a bill of sale for the materials shall constitute sufficient proof of prior importation and HTSUS duty payment. This evidence of proof of importation and payment of duty must be presented to escape duty and any other applicable consequences.

In addition, we require certification on the CF 226 or an accompanying document by a person with direct knowledge of the fact that an article was imported for the purpose of either then- existing or intended future installation on a company's vessels. Ordinarily, the vessel's master would not have direct knowledge of that fact, and an agent may also be without such knowledge. Customs has in the past linked this duty remission provision to the duty assessment provision in subsection (a) of the statute. In the face of argument to the contrary 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 a 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 other logical placement 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; it is 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 cost labor is dutiable.

Uniform treatment will be accorded to parts sent from the United States for use in vessel repairs abroad, regardless of whether they are proven to be produced in the U.S., or have been proven 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.

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 "finally liquidated" (i.e., for which a timely protest was filed or court action initiated) 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 has not been "finally liquidated" as noted above, the new section 1466(h) is applicable to this entry as it relates to spare parts.

Upon reviewing the record we note that Wilson Walton invoice no. 00017521 (Item A of the protest) covers the installation of an impressed current system (ICCP) which supplemented the existing system to provide adequate protection from galvanic corrosion. In addition, Lisnave invoice no. 1002/89/LISN, item 23 (Item B of the protest) covers the foreign shipyard labor necessary for this installation. These costs together evidence a modification to the subject vessel and therefore are nondutiable.

In regard to Items C, E, and F of the protest (Chris-Marine U.S.A., Inc., invoice no. 2684, Williams & Wells invoice nos. 647181 and 647184, and Jotun Valspar Marine Coatings invoice 23- 43774), each one covers parts sent from the United States. In view of our interpretation of section 1466(h) as discussed above, these parts are nondutiable. Furthermore, the U.S. labor covered in Chris-Marine invoice no. 2684 is nondutiable.

Item D of the protest is an invoice from MATATEC Marine Services Ltd. of Great Britain covering labor and parts. The protestant contends that the exchange rate used by Customs in calculating this invoice for liquidation should have been 1.61 instead of 1.8225. In regard to the conversion rate of foreign currency used in liquidating entries of merchandise, pursuant to 19 CFR 159.32 (referencing 19 CFR 152.1(c)) the rate is that which is in effect on the date of exportation (i.e., the actual date the merchandise finally leaves the country of exportation for the United States). In regard to vessel repair entries, the date of sailing (i.e., the date the vessel left the foreign country where repair work was done) is considered the date of exportation. We note, however, that in view of the fact that the OVERSEAS HARRIETTE never sailed from Great Britain (where the MATATEC invoice originated) but from Portugal the exchange rate is that which existed on the date of the invoice (February 10, 1989). On that date the exchange rate for the United Kingdom as set by the Federal Reserve Bank in New York was 1.8225. Accordingly, Customs used the correct rate in converting British pounds in liquidating this particular invoice.

HOLDINGS:

1. Evidence is presented sufficient to prove that the foreign work performed on the subject vessel for which the protestant seeks relief constituted modifications/alterations/ additions to the vessel so as to render the work nondutiable under 19 U.S.C. 1466.

2. Evidence is presented sufficient to prove that various parts were sent from the United States for use in vessel repairs abroad so as to render their cost nondutiable under 19 U.S.C. 1466.

3. Evidence is presented sufficient to prove that labor used to install parts in a foreign shipyard was done by U.S. residents so as to render the cost of the labor nondutiable under 19 U.S.C. 1466.

4. The exchange rate of 1.8225 used by Customs for converting foreign currency in calculating the liquidated foreign vessel repair duties under consideration was the correct rate.

Accordingly, the protest is granted in part and denied in part.

Sincerely,

Stuart P. Seidel

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