HQ 0112025 - Vessel Repair; 19 U.S.C. 1466; Application for Relief; Vessel Repair Entry No. C16-0008522-4; M/V NEDLLOYD HOLLAND V-39 - United States International Trade Commision Rulings

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HQ 112025

February 20, 1992

VES 13-18 CO:R:IT:C 112025 MLR

CATEGORY: CARRIER

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

RE: Vessel Repair; 19 U.S.C. 1466; Application for Relief; Vessel Repair Entry No. C16-0008522-4; M/V NEDLLOYD HOLLAND V-39

Dear Sir:

This letter is in response to your memorandum of December 4, 1991, which forwards for our review and consideration the above- referenced Application for Relief from the assessment of vessel repair duties submitted by Sea-Land Service, Inc.

FACTS:

The record reflects that the subject vessel, the M/V NEDLLOYD HOLLAND, arrived at the port of Charleston, South Carolina, on July 18, 1991. Vessel repair entry, number C16- 0008522-4, was filed on the same day as arrival indicating work performed on the vessel in Bremerhaven, Germany.

The vessel owner timely filed an application for relief on September 5, 1991. Numerous invoice items are claimed nondutiable. We are asked to review the dutiability of the following items:

Lloyd-Werft Invoice 0-161:

1. Item 028: Sea-chest inspection operations which may involve some repair elements.

2. Item 033: Coating applied to the fathometer well.

3. Item 092A: Alleged modifications to compressed starting air system

4. Items 192 and 195: The segregated cost of venting operations and lighting.

Lloyd-Werft Invoice 0-186:

5. Items 020 and 039: Propeller replacement

6. Item 206D: Test done in conjunction with stern tube seals overhaul.

Lloyd-Werft Invoice 0-187:

7. Item 137: Transport Cost.

8. Lloyd-Werft Invoice 0-185: Combination of modification and repair.

9. IHI 195-HL-7069: Origin of O-Rings.

ISSUE:

Whether the foreign work performed on the subject vessel for which the applicant seeks relief is dutiable 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.

I. Lloyd-Werft Invoice 0-161:

Certain vessel inspection operations are generally considered non-dutiable. Where periodic surveys are undertaken to meet the specific requirements of, for example, a classification society or insurance carrier, the cost of the surveys is not dutiable even when dutiable repairs are effected as a result thereof. C.S.D. 79-277. 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.

Pursuant to published Customs Service rulings (C.I.E. 1325/58 and C.I.E. 565/55), duties may not be remitted in circumstances in which invoices fail to segregate dutiable from non-dutiable expenditures. Such is the case in regard to invoice item 028 which involves opening sea-chests for cleaning and inspection by the Coast Guard and American Bureau of Shipping. Included in the item is the unsegregated cost of renewing missing or defective fasteners, a repair expense. The presence of this unsegregated expense renders the entire item subject to duty as a repair expense.

The same rationale may be applied to item 033, the inspection of the fathometer well. Customs has held that painting performed on existing portions of a vessel is in the nature of a dutiable maintenance operation. C.I.E. 1043/60, and Treasury Decisions 21670, 39507, and 43322. Customs has also held that coating with substances which have protective and preservative qualities is analogous to painting and therefore is dutiable (see C.I.E.'s 1203/60, 518/63 and 2045/66). The process of chipping, scaling, cleaning, and wire brushing to remove rust and corrosion that results in the restoration of a deteriorated item in preparation for painting has also been held to be dutiable maintenance. States Steamship Co. v. United States, 60 Treas. Dec. 30, T.D. 45001 (Cust. Ct. 1931). These precedents are relevant to the operation performed in invoice item 033 which details the scaling and coating of the fathometer well. The item must be considered dutiable.

With regard to item 092A, the applicant alleges that modifications were made to the compressed starting air system. The invoice indicates that one piece of cooler tube was replaced from the ship's spares. The cost of testing and inspection is DM3.910 (German Marks), and the cost of repairs is DM21.213.

In its application of section 1466, 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.

Further, we have held that the removal of an existing, operational system for the purpose of improving the efficient performance of the vessel is not dutiable provided that the work was not performed in conjunction with dutiable repairs. Headquarters Ruling Letter 109971, dated June 12, 1989. 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.

In regard to the item specified for our review, we note that the work done to the compressed starting air system constitutes a dutiable repair and/or dutiable work done in conjunction with such repair rather than a nondutiable modification. The record also does not contain any evidence that the replaced cooler tube came from the ship's spares, and that applicable duty thereon has been paid. There appears to be no proof, other than a self serving statement that it was replaced from the ship's spares.

In addition, we note that C.S.D. 79-277 does not exempt from duty repair work done by a shipyard in preparation of a required survey. 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. Therefore, the testing and inspection, indicated under item 092A, is dutiable.

Items 192 and 195 designate segregated costs for venting operations and lighting. In the case of United States v. George Hall Coal Co., 134 F. 1003 (1905), it was held that any of various types of expenses associated with foreign shipyard operations are classifiably free from the assessment of duty, regardless of the character of the overall shipyard work (repair vs. modification). The case found that the expense of drydocking a vessel is not a repair cost. Drydocking is not an isolated expense, and is commonly associated with numerous others. These may include, but are not limited to, sea water supply (for firefighting capability), fresh water supply, hose hook-up and disconnection, fire watch services, shore power hook-up, etc. We would place the segregated cost of venting (item 192) in this category and would thus allow as duty-free such an expense as it appears in invoice item 189.

Similarly, pursuant to CD 1836 charges for drydocking, for furnishing electricity, air and water, fees paid for the use of tugs and pilots in drydocking and undocking a vessel, and crane expenses are not dutiable repairs if segregated on the invoice. The cost of lighting (items 192 and 195) is therefore not dutiable. However, the cost of obtaining a gas free certificate constitutes an ordinary and necessary expense incident to repair operations and is accordingly dutiable. C.I.E. 1188/60. The charge, though, should be apportioned between the costs which are to be remitted and those for which relief is not warranted, and duty assessed on that portion of the charge applicable to items which are not being remitted.

II. Lloyd-Werft Invoice 0-186:

If a survey is conducted to ascertain the extent of damage sustained, whether repairs are necessary, or if the work was adequately completed, then the costs are dutiable as part of the repairs that are accomplished. C.I.E. 429/61; C.S.D. 79-2, 13 Cust. B. & Dec. 993 (1979); C.S.D. 79-277, 13 Cust. B. & Dec. 1395, 1396 (1979). Therefore, items 020 and 039, which involved an inspection of the propeller and tailshaft to determine the extent of damages, are dutiable. Further, the stern tube oil system pressure test (item 206D), which checked the effectiveness of repairs conducted in the stern tube seals overhaul (a dutiable repair), constitutes a dutiable inspection.

III. Lloyd-Werft Invoice 0-187:

Customs has consistently held that transportation charges of parts, equipment, or machinery to and from the job are not dutiable as expenses of repairs, if properly segregated from the repair charges. C.D. 1836; C.I.E. 204/60; C.I.E. 518/63; C.I.E. 1325/58. Because the cost for the transport of parts is segregated from the repairs conducted to the cylinder block (item 137), these transportation costs are not dutiable.

IV. Lloyd-Werft Invoice 0-185:

Next, we consider the invoice depicting work done to a damaged crosshead. The applicant has broken out the costs as: Modifications DM12.000, Removals DM13.390, Transport DM8.005, and Repairs DM15.625. In support of the claim that the work performed is a modification, the applicant has submitted a "Technical Information Diesel Bulletin" from Sulzer, indicating that the cylinder cover stud can be modified to prevent cracking. The operation basically involved: work on the crosshead (i.e., removal, polishing, removing the cylinder cover and piston, opening the crosshead bearings, removing the crosshead guides, reinstallation, and pressure testing); removing and replacing six bolts from the vessel's spares, and sealing them with special Silicone jointing compound; cuting the existing thread holds in the cylinder block; inspecting the bolts for cracks; and modifying the bolts, as directed by the Sulzer Bulletin drawing.

As discussed above, (see section relating to modifications) the issue is whether the work described would constitute modifications to the hull and fittings so as to render the work nondutiable under 19 U.S.C. 1466. The only part of the work performed that possibly constitutes a modification involves work described under (b) of the invoice: the existing stay bolts are inspected for cracks, and are "modified" according to the Sulzer drawing. Customs has held that for an item to be characterized as a nondutiable modification, it must encompass the installation of an item as a new design feature, not as a replacement for, or restoration of, parts now performing a similar function. As stated above, we have 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.

Under long-standing and consistently applied administrative policy, an installation, even one of a permanent nature, is considered to be a dutiable repair rather than a modification if the installation addresses a repair need. Thus, if an area of a vessel is enhanced by the replacement of one permanent installation with another, the operation is considered dutiable if evidence reveals that a defect or wastage was present in the former installation, which condition was cured by replacement.

In the present case, we note that the work performed relates less to a new design feature, but more to a defect present in the former installation which was cured by inspecting and reshaping the bolts. Further, the "overhaul" and polishing of the crosshead relates more to maintenance; therefore, the costs incurred, except for transportation, are dutiable.

V. IHI 195-HL-7069:

The applicant claims that duty on the spare O-Rings was already paid . The vessel repair statute exempts from duty spare repair parts or materials that have been manufactured in the United States or have been previously imported into the United States as commodities with applicable duty paid under the Harmonized Tariff Schedule of the United States. 19 U.S.C. 1466(h). For purposes of this section, where a part is purchased from a party unrelated to the vessel owner, a United States bill of sale constitutes sufficient evidence to demonstrate that the part was either manufactured in the United States or entered in the United States, duty-paid. 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 Customs Form 226. It is our policy to require evidence beyond an affidavit from an interested party to establish U.S. manufacture and U.S. purchase.

We have reviewed the invoices included in the application and have determined that the applicant's explanations on how the duty could have been paid, do not satisfy the evidentiary requirements for duty exemption. The O-Rings are not of U.S. origin (purchased in Japan), nor is their any record of a Customs Form 226 indicating that duty was paid. For these reasons, the O-Rings are dutiable.

HOLDING:

After review of the evidence before us, we recommend that the application for relief be denied in part and allowed in part, as specified in the Law and Analysis section of this ruling.

Sincerely,

B. James Fritz

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