HQ 0111792 - Vessel Repair; Modifications; Invoice; Translation; United States Parts; Fish Nets; 19 U.S.C. 1466; 19 C.F.R. 4.14(d)(1)(iv); F/V PROGRESS; Entry No. H24-0010263-6. - United States International Trade Commision Rulings

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HQ 111792

January 9, 1992

VES-13-18 CO:R:IT:C 111792 JBW

CATEGORY: CARRIER

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

RE: Vessel Repair; Modifications; Invoice; Translation; United States Parts; Fish Nets; 19 U.S.C. 1466; 19 C.F.R. 4.14(d)(1)(iv); F/V PROGRESS; Entry No. H24-0010263-6.

Dear Sir:

This letter is in response to your memorandum of July 3, 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 F/V PROGRESS, arrived at the port of Anchorage, Alaska, on January 4, 1991. Vessel repair entry, number H24-0010263-6, was filed on the same day as arrival. The entry indicates that the vessel underwent a dry-docking in Japan during December, 1990. During the dry-docking, the company employing the agents coordinating the shipyard work went out of business. Consequently, the vessel operator has been dealing directly with the various vendors of items used in the dry-docking, which in turn has resulted in the submission of untranslated invoices and invoices that the operator claims are substantially above the standard price. The dry-docking involved, among other items, the installation of a new plate freezer. The vessel operator seeks relief for this item as a modification. The vessel operator also seeks relief for items that it claims are classifiably free of duty, but the invoice is in Japanese. You also request advice on the dutiablity of fish nets purchased in the United States for installation on the vessel in Japan.

ISSUES:

(1) Whether the installation of the freezer plates in the vessel constitutes a modification, the cost of which is not subject to duty under 19 U.S.C. 1466.

(2) Whether an untranslated invoice may be submitted as part of an application for relief from the assessment of vessel repair duties.

(3) Whether fishing nets purchased from a United Stats supplier that were shipped to the vessel in Japan are 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.

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.

For purposes of section 1466, 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.

T.D. 34150, 26 Treas. Dec. 183, 184 (1914)(quoted with approval in Admiral Oriental).

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.

The applicant seeks relief for costs appearing in Part I of the Mayekawa Mfg. Co., Ltd., invoice for the installation of a contact freezer. We have reviewed the descriptions provided in the invoice and conclude that the installation of the contact freezer represents a new design feature. Accordingly, the cost of the installation is not subject to duty.

Part II of the Mayekawa invoice includes costs for service of the ship's existing refrigeration system. The applicant acknowledges that these costs are dutiable. However, two items appearing after the grand total (i.e., the sum of Part I and Part II of the invoice) that adjust the final invoice amount are problematic.

First, the shipyard deducted from the grand total a "special discount" in the amount of 1,224,290. The Customs Service recognizes that only actual expenses borne by the vessel should be taken into consideration when liquidating vessel repair entries; we have thus permitted the deduction of "discounts," which are properly documented, from the invoiced cost of parts or materials. Headquarters Ruling Letter 111230, dated November 8, 1990; C.I.E. 227/63, dated December 20, 1962. In cases where dutiable and non-dutiable work appears, the discount must be apportioned between such work. Headquarters Ruling Letter 111230. In this case, the discount is not apportioned on the invoice. The discount must therefore be disallowed when calculating the dutiable value of the work. Thus, the dutiable cost for the servicing of the ship's refrigeration system is 4,088,340 (subtotal of Part II).

Second, the shipyard added a three percent consumption tax after the discount was taken. The Customs Service has held that foreign government taxes constitute dutiable expenses as that term is used in the vessel repair statute. Headquarters Ruling Letter 111304, dated March 4, 1991. Because the discount was not apportioned, the dutiable cost of the tax must be calculated based on the cost for servicing the ship's refrigeration system; this amount is 122,650. Thus, the total dutiable cost for the Mayekawa invoice is 4,210,990.

The applicant also seeks relief for items that it claims are classifiably free from vessel repair duty. These items appear on the Furuno Company invoice, which was submitted in Japanese. The Customs Regulations require that a certified translation accompany documentary evidence submitted in a foreign language. 19 C.F.R. 4.14(d)(1)(iv) (1991). Without such translation, this office is unable to evaluate the merits of the applicant's claim. The costs appearing on the Furuno Co. invoice are therefore subject to duty.

Finally, you request our advice on the dutiability of nets purchased from a United States company for installation on the vessel in Japan. The recognition of nets as equipment for purposes of the vessel repair statute has been longstanding. See Otte v. United States, 30 Tres. Dec. 1043, T.D. 36489 (C.C.A. 1916). The recent amendment to the vessel repair statute that exempts from duty spare repair parts or materials that have been manufactured in the United States or entered the United States duty-paid explicitly excludes nets or netting from the scope of the exemption. 19 U.S.C. 1466(h).

Failing qualification for the exceptions accorded to spare parts under 19 U.S.C. 1466(h), we must evaluate the petitioner's claims regarding duty treatment of parts under the previously established statutory rules. Customs administration of duty assessment issues under section 1466 regarding United States manufactured materials purchased in the United States has been guided by the terms of Treasury Decision 75-257. T.D. 75- 257, 9 Cust. B. & Dec. 576 (1975). That decision provides that when materials of United States manufacture are purchased by the vessel owner in the United States for installation abroad by foreign labor, the labor cost alone is subject to duty under 19 U.S.C. 1466. Id.; Headquarters Ruling Letter 111065, dated February 4, 1991. The owner or master must submit written documentation or other physical evidence, such as an affidavit by the equipment manufacturer, that the equipment was manufactured in the United States. See Headquarters Ruling Letter 110953, dated September 19, 1990. Review of the documentation submitted does not reveal the country of origin of the nets. In the absence of such evidence, we find the cost of the nets to be subject to duty.

HOLDINGS:

(1) The installation of the freezer plates in the vessel constitutes a modification, the cost of which is not subject to duty under 19 U.S.C. 1466. However, because a discount was not apportioned between dutiable and non-dutiable items in the invoice, this discount must be disallowed when calculating the dutiable value of the work. Similarly, because the discount was not apportioned, the dutiable cost of the tax must be calculated based on the entire cost of the dutiable work.

(2) An untranslated invoice may not be submitted as part of an application for relief from the assessment of vessel repair duties. Costs appearing under this invoice are subject to duty.

(3) Absent evidence of United States manufacture, fishing nets purchased from a United States supplier that were shipped to the vessel in Japan are subject to duty under 19 U.S.C. 1466.

Sincerely,

B. James Fritz
Chief

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