HQ 0111786 - Vessel Repair Entry No. C31-0008329-5; VERONICA M; Conversion Work; 19 U.S.C. 1466 - United States International Trade Commision Rulings

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HQ 111786

November 18, 1991

VES-13-18-CO:R:IT:C 111786 GEV

CATEGORY: CARRIER

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

RE: Vessel Repair Entry No. C31-0008329-5; VERONICA M; Conversion Work; 19 U.S.C. 1466

Dear Sir:

This is in response to your memorandum dated June 21, 1991, transmitting a petition for review of ruling 111427 GEV, dated February 22, 1991. Our findings our set forth below.

FACTS:

The VERONICA M is a U.S.-flag vessel built in New Orleans, Louisiana, in 1968 as an oil field supply vessel primarily used to transport drilling mud. The vessel was documented as a fishing vessel in April of 1987. In May of 1989 the vessel was sold by California Diesel & Equipment, Inc. to Premium Alaska Fishing Corporation and departed Los Angeles, California, for Vancouver, British Columbia, Canada, for the purpose of undergoing a conversion from an oil field supply vessel to a vessel used exclusively as a brine-chilled, fish-carrying cargo vessel (a "fish packer"). The record does not indicate when the subject vessel was purchased by the current owner, Veronica M, Inc.

Subsequent to the completion of this conversion work, which took place during the period of May, 1989, through June 23, 1990, the vessel arrived in the United States on July 1, 1990. A vessel repair entry was filed on July 6, 1990. An application for relief, dated July 6, 1990, was timely filed. The applicant claimed that the conversion work performed and related costs are nondutiable, and that various equipment purchased in the United States and placed on board the vessel prior to its departure for Canada was installed by members of the regular crew and U.S. residents and therefore is also nondutiable. In support of these claims the applicant submitted invoices and various other
documentation. By ruling 111427 GEV, dated February 22, 1991, Customs denied the application in part on the basis of the insufficiency of the aforementioned invoices and documentation.

Pursuant to an authorized extension of time, a petition on the above ruling was timely filed on June 12, 1991. The petition contains information supplementing the defective invoices. This information is in the form of statements from the vendors of the parts and materials under consideration. If the vendor is no longer in business or available, or if the vendor supplied material only, a statement has been supplied by the engineer/ consultant who was charged with the responsibility for the initiation, oversight and/or approval of the work and materials supplied by the vendor. (see Exhibits A-E)

ISSUES:

1. Whether evidence is presented sufficient to prove that the foreign work performed on the subject vessel for which the applicant seeks relief constitutes modifications/alterations/ additions so as to render the work nondutiable 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 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.

Upon reviewing the record in its entirety, we note the following.

Invoice no. 1 consists of seven invoices of Pacific Western Shipbuilders Co. Ltd. It was alleged that these seven invoices cover a myriad of work, including both materials and labor, included in the conversion of the subject vessel. While the application itself provided a detailed explanation of the work stated to be performed, the invoices themselves did not. Instead, the invoices merely state "Conversion of Veronica "M" to Fish Packer" at the top and list itemized costs of material and labor with no description of the work involved. We held that this, without more, is insufficient to prove that the these costs were in fact performed in conjunction with nondutiable modifications/alterations/additions to the vessel.

Accordingly, the costs listed on the Pacific Western Shipbuilders Co. Ltd. invoices referenced by the applicant as Invoice no. 1 were held to be dutiable with the exception of the following: transportation costs, and the costs of cranes and electrical services (invoice 0022 to June 11, 1989); the costs described as "Berth Vessel" and "Turn Vessel" (invoice 0023 to June 18, 1989); the cost of vessel moorage (invoice 0024 to July 2, 1989); the costs of recharging galley fire extinguishers, steam cleaning tanks, electrical services, and a dumper truck to clean port fuel tanks (invoice 0026 to July 7, 1989); and the cost of water and electrical services (invoice 0028 of July 10- 18, 1989.

In regard to Invoice no. 1, the petitioner submitted a statement of the General Manager, Pacific Western Shipbuilders, Ltd., dated May 22, 1991 (Exhibit A). This statement provides a brief recap of the conversion work done on the subject vessel. It also states that the invoices are correct and that the charges thereon were incurred as part of the conversion work under consideration. Accordingly, the costs covered on Invoice no. 1 are nondutiable.

Invoice no. 3 from Pacific Urethane Systems Ltd. covers the installation of urethane foam in the eight fish holds of the subject vessel. The invoice merely lists a cost of this material. We held that this did not substantiate the claim that these costs were part of nondutiable conversion work and therefore were dutiable. The petitioner, however, has submitted a statement from the owner and operator of Pacific Urethane Systems, Ltd., dated May 15, 1991 (Exhibit B), detailing the permanent installation of the urethane foam during the conversion of the vessel. This statement is further corroborated
by that of a consultant and marine engineer on the project (Exhibit C, page 4). Accordingly, the costs covered on Invoice no. 3 are nondutiable.

Invoice nos. 4, 5, 12, 21, 22 and 23 were found to be dutiable based on the insufficiency of the invoices submitted (i.e., unsigned, undated, handwritten worksheets) and/or the lack of any demonstrated nexus to the conversion work in question. In response to this the petitioner has submitted a statement from a consultant and marine engineer on the project supplementing the deficient invoices and clarifying their nexus to the conversion of the vessel (Exhibits C and E). Accordingly, the charges listed on these particular invoices are nondutiable.

Invoice no. 14 consists of two unsigned, undated, handwritten worksheets not on company letterhead, and a one page invoice from J & J Metal Works Ltd., dated January 17, 1990. These three pages purportedly covered the removal of existing hatches. While a mere removal without more would not be considered dutiable if adequately documented, we could not accept as cost evidence the two handwritten pages referenced above. We therefore granted relief only for the J & J Metal Works Ltd., invoice dated January 17, 1990.

Invoice nos. 15-19 are also from J & J Metal Works Ltd. The application stated that the work covered by these invoices included the following: the removal of existing ballast lines, decking, hatches and bulkheads; the fabrication and installation of new framework to support new refrigeration equipment; and the addition of four eight foot eight inch steel brine lines. The invoices, however, did not appear to reflect these claims. Invoice no. 15 only stated, "Supply men & equipment to burn piping." In addition, Invoice nos. 16-19 all state only, "Supply men, equipment & material." In view of the fact that this documentation did not appear to support the applicant's claims, the costs listed on Invoices 15-19 were held to be dutiable with the exception of the cost of a crane on Invoice no. 16.

In regard to Invoice nos. 14-19, the petitioner has submitted a statement from the Vice President, J & J Metal Works Ltd. indicating that he was personally responsible for supervising the actual work in question as well as the invoicing of the services and materials provided by that company (Exhibit D). This statement supplements and clarifies the invoices in question. It is further stated that these costs were not repair work but rather were incurred as a result of the conversion of the vessel from an oil field tender to a fish transport and packer using a brine tank system. Accordingly, Invoice nos. 14- 19 are nondutiable.

It should be noted that unlike the application regarding this particular vessel repair entry, the petition and supporting documentation are sufficient to prove that the foreign costs in question were pursuant to conversion work and therefore are nondutiable. Accordingly, the applicability of 19 U.S.C. 1466(h) to the costs in question is irrelevant.

HOLDINGS:

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

Accordingly, the petition is granted.

Sincerely,

B. James Fritz

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