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HQ 111756


January 14, 1992

VES-13-18 CO:R:IT:C 111756 JBW

CATEGORY: CARRIER

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

RE: Vessel Repair; Modification; Survey; Inspection; AMERICAN TRADER; Entry No. 779-1515437-9; 19 U.S.C. 1466.

Dear Sir:

This letter is in response to your memorandum of June 12, 1991, 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 AMERICAN TRADER, arrived at the port of Bellingham, Washington, on January 27, 1991. Vessel repair entry, number 779-1515437-9, was filed on January 28, 1991. The entry indicates that the vessel underwent shipyard work in Vancouver, British Columbia, Canada. Specifically, work was performed in the Versatile Pacific Shipyard on the ship's number 3 port saltwater ballast tank, the number 1 port cargo tank bulkhead number 93, and the number 4 center to the number 4 port cargo tank. The applicant claims that such work constitutes modifications to the vessel, the cost of which is not subject to duty. The applicant also seeks relief for the cost of a survey carried out by the American Bureau of Shipping (ABS) in Vancouver.

ISSUES:

(1) Whether the work performed in the Versatile Pacific Shipyard constitutes a modification to the vessel that is not subject to duty under 19 U.S.C. 1466.

(2) Whether the American Bureau of Shipping survey performed in Vancouver was repair related and is consequently subject to duty 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.

The applicant seeks relief for work that the applicant claims is not dutiable as a modification. 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. 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 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.

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.

Versatile Pacific Shipyards invoice items 5 and 6 relate costs for "steel modifications" performed in the area of the number 3 port salt water ballast tank. The applicant claims that during the course of a Coast Guard inspection on January 18, 1991, it was discovered that changes in the Coast Guard regulations "required" these "modifications" to the hull of the vessel. However, the ABS survey (No. VA10751-A) that was performed in Vancouver indicates that shell plating fractures were discovered during the January 18, 1991, inspection. The work description of items 5 and 6 and the ABS description of the areas in which fractures were discovered match exactly. We therefore find the costs for steel modifications appearing under Versatile Pacific Shipyard invoice items 5 and 6 to be repair related and subject to duty.

Versatile Pacific Shipyards invoice items 7 and 8 relate costs for work on two cargo tanks. The applicant claims that this work was performed to meet Coast Guard and ABS requirements, but the applicant did not specify what those requirements are. Moreover, no drawings were submitted to show what work was performed. Absent such descriptions, we cannot conclude that the work performed under these items was not repair related. The costs appearing under these items are therefore subject to duty.

The Customs Service has held that where periodic surveys are undertaken to meet the specific requirements of a governmental entity, a classification society, or insurance carrier, the cost of the surveys is not dutiable even when dutiable repairs are effected as a result thereof. Headquarters Ruling Letter 110368, dated July 26, 1989. In a recent case, we emphasized that this interpretation exempts from duty only the cost of a required scheduled inspection by a qualifying entity. Headquarters Ruling Letter 111328, dated August 7, 1991. If, however, the survey is to ascertain the extent of damage sustained or whether repairs are deemed necessary, then the costs are dutiable as part of the repairs that are accomplished. C.I.E. 429/61; C.S.D. 79-2, 13 Cust. B. & Dec. 993 (1979); C.S.D. 79-277, 13 Cust. B. & Dec. 1395, 1396 (1979). In the liquidation process, Customs should look beyond the mere labels of "continuous" or "ongoing" before deciding whether the item is dutiable. If an inspection or a survey is conducted as a part of a maintenance and repair program labelled "continuous" or "ongoing," the cost of such survey is dutiable if it is in fact repair related.

ABS invoice, number 15551839164, itemizes costs for three inspections undertaken by the ABS while the vessel was in Vancouver: Special Continuous Survey of Machinery and Electrical Equipment; Hull Damage Repairs; Survey on Drydocks. Other costs appeared on the invoice for "time outside of normal working hours" and "total expenses." From the previous paragraph, we conclude that the cost of the hull damage repair survey is dutiable. Further, the reports relating to the machinery and electrical equipment survey and the survey on drydocks were not included with the application. Other than the general descriptions offered by the titles of these surveys, we do not know the nature, purpose, or contents of these surveys. Without such information, we cannot determine whether the surveys were repair related; we conclude therefore that the costs for these surveys are also dutiable. Finally, the applicant claims that duty on the overtime expenses and total expenses should be proportionate to the dutiable and non-dutiable charges. The Customs Service has held that the cost for expenses must be segregated between dutiable and non-dutiable charges or else the entire cost for the expenses will be subject to duty. Headquarters Ruling Letter 111266, dated December 20, 1990. Thus, even if we had found that the machinery and electrical equipment survey and the survey on drydocks were not subject to duty, the overtime and total expenses, which were not segregated, would nevertheless have been subject to duty.

HOLDINGS:

(1) The ABS survey indicates that work performed in Versatile Pacific Shipyards invoice items 5 and 6 was for the repair of shell plating fractures. We therefore find the costs for steel modifications appearing under Versatile Pacific Shipyards invoice items 5 and 6 to be repair related and subject to duty. The description of the work performed in items 7 and 8 of the Versatile Pacific Shipyards was not of sufficient detail to permit this office to conclude that the work constituted a non-dutiable modification. The costs appearing under this item are therefore subject to duty.

(2) We find dutiable the costs appearing under ABS invoice, number 15551839164, for the three inspections undertaken by the ABS while the vessel was in Vancouver. Other costs appearing on the invoice for "time outside of normal working hours" and "total expenses" are also subject to duty.

Sincerely,

B. James Fritz
Chief

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