HQ 0112050 - Vessel Repair; Modification; Negotiated Price Reduction; Petition for Review; GLACIER BAY; Entry No. C31-0008312-1 - United States International Trade Commision Rulings

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HQ 112050

April 7, 1992

VES-13-18 CO:R:IT:C 112050 LLB

CATEGORY: CARRIER

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

RE: Vessel Repair; Modification; Negotiated Price Reduction; Petition for Review; GLACIER BAY; Entry No. C31-0008312-1

Dear Sir:

This letter is in response to your memorandum of December 10, 1991, which forwards for our determination the petition for review of the Customs decision in case number 111483, covering the application for relief filed in conjunction with the above- referenced vessel repair entry.

FACTS:

The record reflects that the subject vessel, the S/S GLACIER BAY, arrived at the port of Valdez, Alaska, on June 3, 1990. Vessel repair entry, number C31-0008312-1, was filed on June 4, 1990, and was marked incomplete. A complete entry was filed on August 29, 1990, pursuant to an extension of time authorized by the Pacific Region Vessel Repair Liquidations Unit. The complete entry indicated extensive foreign shipyard work in the nature of a complete drydocking, including both repairs and work claimed to be non-dutiable as modifications, inspections, and cleaning.

A decision was rendered on an application for relief filed in regard to the subject entry, and the appeal from that decision requests review of two elements. The first concerns the dutiability of invoice item 715, work on the oil-tight longitudinal bulkhead. The second element presented for review is whether a reduction negotiated between the repair facility and the vessel operator may be honored for purposes of determining the duty amount which should be liquidated by Customs.

ISSUE:

(1) Whether duty may be remitted for modification work undertaken to address an area of a vessel which is subject to a frequently recurring need for repairs.

(2) Whether a negotiated reduction in the amount payable for foreign shipyard operations, agreed upon between a foreign shipyard and a vessel operator, may be taken into account for purposes of reducing overall vessel repair duty liability.

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.

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.
It is the long-held position of the Customs Service that even if an operation is a true modification to the vessel, if an unsegregated repair element is accomplished in conjunction with the modification process, the entire cost is considered dutiable as a repair. These circumstances would most typically occur in addressing an area of a vessel subject to frequent service problems by modifying the structure to eliminate the need for recurring repairs. Often the repairs to that area are accomplished at the same time. This was thought to be the case in the present matter in regard to the structural reinforcement operations performed on the longitudinal bulkhead in invoice item number 715, and the item was held to be dutiable in our previous ruling. A second review of the invoices reveals, however, that the foreign shipyard operations were limited to modification processes with no repairs being performed. This being the case, we now find the operation in item number 715 to be a duty-free modification.

In the matter of negotiated discounts or reductions in the payable amount, the Customs Service, in a published ruling (C.I.E. 227/63), held that the actual expenses borne by the vessel operator should be taken into consideration when duty is assessed under the vessel repair statute, and that discounts should be allowed in liquidating vessel repair entries. Accordingly, that portion of the discounted amount which is attributable to dutiable repairs should be deducted from the cost of those repairs.

HOLDING:

After a thorough consideration of the facts as presented, and following an analysis of the law and applicable judicial and administrative precedents, we have determined to allow the Petition for Review as specified above.

Sincerely,

B. James Fritz

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