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HQ 111806


February 7, 1992

VES-13-18-CO:R:IT:C 111806 GEV

CATEGORY: CARRIER

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

RE: Vessel Repair; Entry No. C16-0008501-8; GALVESTON BAY V-33; Re-engining; modification

Dear Sir:

This is in response to your memorandum dated July 17, 1991, forwarding an application for relief from duties assessed pursuant to 19 U.S.C. 1466. You request that we review the work pertaining to the replacement of the vessel's auxiliary diesel engines. Our findings are set forth below.

FACTS:

The GALVESTON BAY is a U.S.-flag vessel owned by Sea-Land Service, Inc. of Edison, New Jersey. The subject vessel underwent shipyard work commencing in Rotterdam, The Netherlands. The vessel sailed from Rotterdam on February 8, 1991, en route to the United States with interim stops in Bremerhaven, Germany, and Felixstowe, U.K.. It arrived in the United States at Charleston, South Carolina, on February 23, 1991. A vessel repair entry was filed on the date of arrival. An application for relief was filed on April 23, 1991.

At issue is the replacement of the subject vessel's three Yanmar diesel engines with new MAN B&W diesel engines which are more fuel efficient and require less maintenance. The engines which were replaced each generated 1000 kw at 720 rpm, burned IF 180 and needed an overhaul every 6000 hours (i.e., once a year). The replacement engines each generate 1000 kw at 720 rpm, burn IF 380 and are guaranteed to be capable of going 20,000 hours before requiring an overhaul (i.e., three and one-half years).

The dismantling of the subject vessel's existing equipment and preparation work (installation of control cabling, lighting relocation, piping alterations, etc.) commenced during the vessel's call at Rotterdam and continued while the vessel was en route to Charleston. The labor was provided by five U.S. citizens or resident aliens all of whom were employees of Golten Marine, Inc., of Brooklyn, New York. Two Danish citizens who are employees of MAN B&W assisted in the preparation work performed between Rotterdam and Charleston. Upon arrival at Charleston the existing engines were removed, the three new engines (foreign- built by MAN B&W and imported into the United States) were placed aboard the vessel and subsequently installed during the vessel's coastwise voyage from Charleston to Port Everglades (February 25, 1991) and Houston (March 2, 1991). The aforementioned Danish citizens oversaw this installation work. In Charleston an additional eight U.S. citizens boarded the vessel to accomplish the installation. Additional shoreside domestic labor and services were provided during the U.S. coastwise calls as needed to assist with the project. The work was completed in Houston.

It is noted that various parts and installation supplies were placed aboard the vessel in Europe to be used in the preparation phase of this project during the voyage to the United States. Furthermore, temporary living modules for the workmen involved were rented from Consafe Engineering (UK) Ltd. These modules were "hooked-up" and connected to the vessel's water, electrical, and sanitary systems, as well as to the fire and alarm circuits.

In support of its claims that the above work is nondutiable, the applicant has submitted the following: (1) invoices from the shipyard and subcontractor detailing the work in question; (2) a copy of Marine Log, dated March 1991, describing the re-engineering of Sea-Land's twelve (12) Atlantic- class vessels of which the subject vessel is included; (3) a list of those personnel who worked aboard the vessel, including their Social Security numbers as proof of U.S. identification; (4) a copy of Article XVII of the work contract which states that "...the contractor will ensure that all work on the vessel performed by its subcontractors will be performed by U.S. citizens or lawful U.S. residents..."; (5) a certification by Sea-Land Service, that the three MAN B&W diesel engines and parts described on MAN B&W invoice no. 77544 were imported into Charleston on February 20, 1991, with the intent that they would be installed on the subject vessel and that the applicable duty has been paid under the Harmonized Tariff Schedule of the United States (HTSUS); (6) a copy of the consumption entry for these engines; and (7) a copy of Sea-Land's "Atlantic Class Vessels (ACV) Auxiliary Diesel Generator Engine Replacement" presentation dated October 24, 1990. This presentation includes a program description, diagrams, and sequence schedules.

ISSUES:

1. Whether the costs of re-engining the subject vessel as described above are nondutiable under 19 U.S.C. 1466.

2. Whether the rental of temporary living modules for the workmen performing the above re-engining and the subsequent work done to them once aboard the subject vessel is 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.

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 with regard to the re-engining of the subject vessel, we note that the applicant has submitted documentation sufficient to justify relief for the cost of the new engines under section 1466(h). In regard to those costs which do not receive the benefits of section 1466(h) (i.e., foreign labor and those parts not meeting the evidentiary requirements previously discussed) we note that Customs has long- held the re-engining of a vessel which enables it to conserve fuel or otherwise operate more efficiently constitutes a nondutiable modification/alteration/addition to the vessel provided no repairs, rebuilding, or construction other than re- engining takes place. Of course, the replacement of a worn engine, even if the change results in a more efficient propulsion system for the vessel, would be considered a repair subject to vessel repair duties under section 1466. (see rulings 108270, 106741, 106564, 104358, and 212.6, the latter dated July 14, 1947) Accordingly, the re-engining costs under consideration (including all parts and labor associated therewith) are nondutiable under the vessel repair statute.

In regard to the rental of temporary living modules used aboard the vessel to accommodate the workmen performing the re- engining described above, we note that pursuant to C.I.E. 289/49 the cost of leasing foreign equipment to be used on a vessel, including the installation costs incurred in connection with leasing the aforementioned equipment, is nondutiable. It further appears that the rental of these temporary living modules is akin to lodging costs which are nondutiable under the vessel repair statute pursuant to C.I.E. 518/63. In addition, costs incidental to nondutiable modifications are themselves considered nondutiable as part of the modification work. Accordingly, the costs for rental of the temporary living modules as well as any work done to them once placed aboard the subject vessel are nondutiable.

HOLDINGS:

1. The costs of re-engining the subject vessel as described above are nondutiable under 19 U.S.C. 1466.

2. The rental of temporary living modules for the workmen performing the re-engineering described above and any subsequent work performed on them once aboard the subject vessel are nondutiable under 19 U.S.C. 1466.

Sincerely,

B. James Fritz

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