HQ 0111948 - Vessel Repair; Entry No. C20-0029778-1; GREEN HARBOUR V-32; Modifications; Equipment; Survey; 19 U.S.C. 1466 - United States International Trade Commision Rulings

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HQ 111948

January 27, 1992

VES-13-18-CO:R:IT:C 111948 LLB

CATEGORY: CARRIER

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

RE: Vessel Repair; Entry No. C20-0029778-1; GREEN HARBOUR V-32; Modifications; Equipment; Survey; 19 U.S.C. 1466

Dear Sir:

This is in response to your memorandum dated October 8, 1991, forwarding a Petition for Review of an earlier Headquarters decision on an Application for Relief from duties assessed pursuant to 19 U.S.C. 1466. It is requested that we review five (5) items listed in the Petition for Review. Our findings are set forth below.

FACTS:

The GREEN HARBOUR is a U.S.-flag vessel owned and operated by Central Gulf Lines, Inc., (Central Gulf) of New Orleans, Louisiana. On July 25, 1985, Central Gulf was awarded a charter from the Military Sealift Command (MSC) for the use of the GREEN HARBOUR in the U.S. Military Rapid Deployment Forces at Diego Garcia in the Indian Ocean. Pursuant to the terms of the charter, Central Gulf was required to alter the vessel from (i) a LASH barge-only vessel to a combination LASH barge-containership, and (ii) from a commercial liner vessel to a military support ship.

The shipyard work in question was performed both in Japan and in the Philippines. The vessel was delivered to the MSC in Subic Bay on November 13, 1985, and was accepted on charter. Thereafter the vessel continuously operated under the charter and did not return to the United States until its arrival at New Orleans on September 25, 1991. A vessel repair entry was filed on October 1, 1990.

ISSUE:

Whether evidence is presented sufficient to prove that the foreign work performed on the subject vessel for which the applicant seeks relief constitutes modifications or costs that are otherwise 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 trades.

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, by 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).

The following items have been specified for our review:

1. Supplemental work performed on a crane installed as a modification. (Item III (G) and (T)).

2. Boiler inspection and cleaning. (Item IV (F)).

3. Commercial laundry apparatus installation. (Item (P)).

4. Painting and coating applied to portions of the vessel.

5. Annual American Bureau of Shipping hull survey.

No new evidence has been submitted, instead we are asked to reexamine the evidence already submitted.

The finding that a particular operation is a modification to the hull and fittings of a vessel does not qualify all later work performed in regard to that operation as duty free modification work. This is the case in regard to the work performed on the crane which was installed on the vessel. While the installation of the crane itself was a modification, we note that shipyard invoices detail repairs which were necessary to various components of the already installed crane. These operations are dutiable repairs.

With regard to the boiler inspection and cleaning, we note that segregated subitem M7-2 details the removal of carbon deposits. This is considered a maintenance item in accord with our rulings on the issue of the cleaning of scavenger air spaces (Customs Ruling 111834, December 17, 1991). Accordingly, this segregated portion of the boiler charges is dutiable.

In reviewing the work performed in connection with the installation of a commercial laundry facility aboard the vessel, we note the new installation of water supply and drainage piping, pipe supports, and ventilation. Additionally, we note welding procedures in connection with the installation of washer and dryer units. Upon reconsideration of this item, we find it to be in the nature of a duty-free modification.

Invoice item III(C) covers coating and painting of the main deck, deck house, and stack house. Pursuant to section C11.4(e)(8) of the MSC charter, coating and painting was to be done to "All new and disturbed surfaces resulting from modification work... The surfaces will be primed and painted to match surroundings with a coating of the same type and color as on adjacent surfaces." However, we note further that section C5 of the charter, entitled "Standards of Appearance", provides, in pertinent part, that, "...the Owner and operator will institute a continuous program of vessel maintenance. The hull, decks, and deckhouses and all appurtenances will be cleaned and preserved as necessary and painted as required." (emphasis added) Upon reviewing the shipyard invoices in question, it is apparent that the painting in question was not done in conjunction with any modification work, but was in fact maintenance painting as referenced in section C5 of the charter noted above. (see, for example, Item H5-1-1 referencing "rusted areas of stack" emphasis added). Accordingly, the coating and painting is dutiable.

In regard to the dutiability of the American Bureau of Shipping (ABS) Annual Hull Survey under consideration, we note the following. 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 ABS or U.S. 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 ABS 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, the C.S.D. held that a survey undertaken to meet the specific requirements of a governmental entity, classification society, or 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 under the C.S.D. by reason of the specific requirements of the U.S. Coast Guard and the ABS. 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 were necessary. Although the invoice indicated 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). 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, upon reviewing the ABS report describing the Annual Hull Survey, it is evident that dutiable repair work was performed during the course of this survey (e.g., "...defective gaskets on weathertight doors were renewed" and "...defective hatch cover cleat catches were renewed..."). It is therefore apparent the survey in question goes beyond mere inspection and is akin to a dutiable maintenance and repair program. Accordingly, the ABS Annual Hull Survey is dutiable.

HOLDING:

Following a thorough review of the evidence submitted as well as an analysis of the applicable law and precedent, we have determined to allow the Petition in part and to deny it in part, as specified in the Law and Analysis portion of this ruling.

Sincerely,

B. James Fritz

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