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HQ 111772


October 10, 1991

VES-13-18-CO:R:IT:C 111772 RAH

CATEGORY: CARRIER

Chief, Technical Branch
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, California 90731

RE: Vessel Repair; 19 U.S.C. 1466; Modification; Survey; Parts

Dear Sir:

This is in response to your memorandum of June 18, 1991, regarding the M/V RESOLUTE.

FACTS:

The record reflects that the M/V RESOLUTE arrived at the port of Dutch Harbor, Alaska, on December 26, 1990. Vessel repair entry number C31-0007666-1 was filed on March 22, 1991, reflecting work performed on the vessel in Ishinomake, Japan, from October 19, 1990, to December 15, 1991.

The MV RESOLUTE was built in Ameli, Louisiana, in 1973. She was converted to a head and gut factory trawler in Seattle, Washington, in 1989. The vessel was converted into a pollock fillet processing vessel at Ishinomake, Japan, on October 19, 1990. The applicant claims that the primary modifications performed by Yamanishi Shipbuilding & Iron Works, Ltd. consisted of: installation of the roe and fillet units; modification of existing conveyors and permanent installation of the additional conveyors to accommodate the roe and fillet units; modification of piping and hydraulic systems to accommodate the roe and fillet units; conversion of bathroom to storeroom; modification of crew quarters by installation of additional bunks and facilities for added crew; installation of post and cargo boom; construction and installation of permanent freeze pan racks and refrigeration modifications; installation of additional electronic units.

Additionally, the applicant seeks relief for various surveys performed and parts installed on the vessel.

The subject of this ruling is an application for relief dated March 18, 1991, and a supplemental application dated June 7, 1991. You specifically ask our advice on the invoices from: Yamanishi Shipbuilding and Iron Works; Det. Norske Veritas; Kawasaki Hydraulics Co., Ltd.; Fujita Tekkosho Co., Ltd.; MK and Furuno Electric Co. Ltd.; Nippon Fillestar Co., Ltd.; Mikasa Trading Co., Ltd.

ISSUES:

Whether the work in question performed on the vessel to convert her into a pollock fillet processing vessel constitutes dutiable repairs under 19 U.S.C. 1466, or non-dutiable modifications.

Whether the surveys performed by Det. Norske Veritas are dutiable under 19 U.S.C. 1466.

Whether the parts for which the applicant seeks relief are dutiable under 19 U.S.C. 1466(h).

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.

Over the course of years, the identification of modification processes has evolved from judicial and administrative prece- dents. 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 hull and fittings took place for the purposes 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 an 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.

In the instant case, we have reviewed the Yamanishi Shipbuilding and Iron Works Ltd. worksheets containing 110 pages
handwritten in Japanese (accompanied by a certified translation), and find that the following items constitute duty free modifications: 1, 2, 6, 8-41, 45-51, 53, 55, 60-63, 71-75, 77-90, 93, 94,97-108, 109.

On the other hand, the following items constitute dutiable repairs: 52; 54; 56; 64-70; 76; 85; 91 and 92.

Items 5 and 7 constitute dutiable equipment.

Items 95 and 96 are dutiable because they are not accompanied by a translation.

Several items listed on shipyard worksheets furnish a brief characterization of the service provided but do not contain a description of the actual work performed. For example, item 3 merely states "modify bathroom in storeroom." Accordingly, we find the following items dutiable: 3; 4; 34; 43; 44; 57; 58 and 59. Likewise, items 1-6 on the Kawasaki Hydraulics Co., Ltd. invoice are dutiable.

With regard to the Fujita Tekkosho Co. Ltd. invoice, items 1-14 cover a permanently affixed belt conveyor system that is an integral part of the new trade operation of the vessel and are part of the non-dutiable modifications. Item 1 on the Nippon Fillestar Co., Ltd. invoice is also part of the non-dutiable modifications.

The applicant claims that the MK invoice is comprised of transportation charges which are non-dutiable. The MK invoice description is for "shipping cargo" to the M/V RESOLUTE at Yamanishi Zosen, Ishinomaki. Customs has long held that shipping, crating, and packing are non-dutiable. C.D. 1830. Hence, we find the shipping charges on the MK invoice non- dutiable.

Concerning the Mikasa Trading Co., Ltd. invoice, the search light and socket for search light constitute dutiable equipment. The light bulbs are non-dutiable supplies.

Furthermore, the applicant contends that the three Furuno Electrico, Ltd. invoices cover electronic items, imported into the United States, duty paid under the U.S. Tariff Schedules, and placed aboard the vessel prior to departure to Japan, and the under the provisions of H.R. 1594, only the costs of installation are dutiable.

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) provides in part:

(h) The duty imposed by subsection (a) of this section shall not apply to--

(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. (Emphasis added).

Since the M/V RESOLUTE is not a cargo vessel it is not governed by subsection (h). Thus, in order to receive duty-free treatment the spare parts in question must comply with 19 C.F.R. 4.14(c)(3)(ii). That provision provides for remission or refund of duty if:

The equipment, equipment parts, repair parts or materials used on the vessel were manufactured or produced in the Untied States and purchased by the owner of the vessel in the United States, and the labor necessary to install such equipment or to make such repairs was performed by residents of the United States or by members of the regular crew of the vessel.

In the instant case, Furuno Electric Co., Ltd. invoice nos. SFE/90/I-162, 163 and 164 show that the parts in question were sent from Kobe, Japan to Seattle, Washington, for the F/V RESOLUTE. There is also an invoice from customs brokers covering the costs of estimated duties, fees and services for the consumption entry (entry #603-00712031-5) pertaining to the parts in question. There is no evidence that the parts were manufactured or produced in the United States or that they were installed by U.S. residents or regular members of the crew. Accordingly, the parts on the Furuno Electrico Co. Ltd. invoice are dutiable.

Finally, the applicant asserts that the Det Norske Veritas surveys are non-dutiable. C.S.D. 79-277 stated, "[i]f the survey was undertaken to meet the specific requirements of a governmental entity, classification society, insurance carrier,
etc., the cost is not dutiable even if dutiable repairs were effected as a result of the survey."

With increasing frequency, this ruling has been utilized by vessel owners seeking relief not only from charges appearing on an A.B.S. or Coast Guard invoice (the actual cost of the inspection), but also as a rationale for granting non-dutiability to a host of inspection-related charges appearing on a shipyard invoice. In light of this continuing trend, we offer the following clarification.

C.S.D. 79-277 discussed the dutiability of certain charges incurred while the vessel underwent biennial U.S. Coast Guard and A.B.S. surveys. That case involved the following charges:

ITEM 29
(a) Crane open for inspection.
(b) Crane removed and taken to shop. Crane hob and hydraulic unit dismantled and cleaned.
(c) Hydraulic unit checked for defects, OK. Sundry jointings of a vessel's spare renewed.
(d) Parts for job repaired or renewed.
(e) Parts reassembled, taken back aboard ship and installed and tested.

In conjunction with the items listed above, we held that a survey undertaken to meet the specific requirements of a governmental entity, classification society, insurance carrier is not dutiable even when dutiable repairs are effected as a result of the survey. We also held that where an inspection or survey is conducted merely to ascertain the extent of damages sustained or whether repairs are deemed necessary, the costs are dutiable as part of the repairs which are accomplished (emphasis added).

It is important to note that only the cost of opening the crane was exempted from duty by reason of the specific requirements of the U.S. Coast Guard and the A.B.S. was exempted from duty. The dismantling and cleaning of the crane hob and hydraulic unit was held dutiable as a necessary prelude to repairs. Moreover, the testing of the hydraulic unit for defects was also found dutiable as a survey conducted to ascertain whether repairs are necessary. Although the invoice indicates that the hydraulic unit was "OK," certain related parts and jointings were either repaired or renewed. Therefore, the cost of the testing was dutiable.

We emphasize that the holding exempts from duty only the cost of a required scheduled inspection by a qualifying entity (such as the U.S. Coast Guard or the American Bureau of Shipping (A.B.S.). In the liquidation process, Customs should go beyond
the mere labels of "continuous" or "ongoing" before deciding whether a part of an ongoing maintenance and repair program labelled "continuous" or "ongoing" is dutiable.

Moreover, we note that C.S.D. 79-277 does not exempt repair work done by a shipyard in preparation of a required survey from duty. Nor does it exempt from duty the cost of any testing by the shipyard to check the effectiveness of repairs found to be necessary by reason of the required survey.

Turning to the case before us, although we do not find any proof that the surveys were required it is apparent that they were performed in conjunction with the conversion of the vessel from a head and gut factory trawler into a pollock fillet processing vessel. Therefore, we find the surveys to be non- dutiable as part of the modifications.

HOLDINGS:

The work in question performed on the vessel to convert her into a pollock fillet processing vessel includes both dutiable repairs under 19 U.S.C. 1466, and non-dutiable modifications, as discussed above.

The surveys performed by Det. Norske Veritas are non- dutiable under 19 U.S.C. 1466.

The parts on the Furuno Electrico Co., Ltd. invoice for which the applicant seeks relief are dutiable under 19 U.S.C. 1466(h).

Sincerely,

B. James Fritz
Chief

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