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HQ 112179


May 6, 1992

VES 13-18 CO:R:IT:C 112179 MLR

CATEGORY: CARRIER

Peter S. Herrick
3520 Crystal View Court
Miami, Florida 33133

RE: Vessel Repair Entry No. C31-0008307-1; Protest No. 3126-92- 100004; Modification; Spare Parts; M/V NORTHERN HERO.

Dear Sir:

This letter is in response to your protest filed on behalf of Palmco Pacific Corp.

Before we discuss our findings, we first reply to your request that Customs not issue a ruling on the merits but, in lieu thereof, issue a letter to you that identifies why Customs is unable to issue a ruling favorable to your client so that you may submit additional argument. You cite 19 CFR 174.28, as authority for this request; this section does not anticipate an exchange of unofficial rulings and counterclaims such as you propose. A clear result of such a procedure would be indecision on the merits of a case. Further, you have not submitted any additional written position, a condition precedent of section 174.28. It also appears that your client, or you on your client's behalf, waived an opportunity to present additional arguments at the petition for review level.

In addition to the above, we invite...since it apparently does not go to the substance of the case...any explanation why the Aizawa invoice no. 1, dated February 28, 1990, was changed after the application for relief was denied to show additional charges of 192,000 yen. We also note and did not discover a purpose for submitting in the protest under Exhibit A, Aizawa invoice no. 21b, retyped and renumbered as invoice 17 and lacking item no. 4 (spare parts & tools), yet submitting it unchanged from the application for relief in Exhibit B of the protest.

FACTS:

The record reflects that the subject vessel, the M/V NORTHERN HERO, arrived at the port of Dutch Harbor, Alaska, on June 9, 1990. Vessel repair entry, number C31-0008307-1, was filed on June 15, 1990. The record reflects that the vessel was converted from an oil rig supply vessel to a stern trawler head and gut fish factory processing vessel. The Aizawa Shipping Company managed the conversions, which actually took place at Murakami Shipyards, Ishinomaki, Japan. The work included removing the superstructure, lengthening the vessel, constructing a new superstructure, replacing the engine to accommodate a different propulsion system, installing a hydraulic system to operate trawl nets, and installing freezing and processing areas.

The entry was liquidated on October 25, 1991. The protest was timely filed on January 22, 1992. You claim that certain items contained in the Aizawa Shipping Company invoices are non- dutiable modifications. The modification claim was denied in the application for relief (see Customs Ruling 111464) because the evidence presented was not sufficient to conclusively establish that the work performed to the vessel was a modification. Consequently, you have submitted drawings a-n indicating the structural changes made to the vessel. The services of expert marine surveyors, Nelson & Associates, Inc., were retained to review the work performed. An excerpt from their report provides:

Only those items which involve permanent change or installation and were required to be changed or modified in order for the vessel to perform the new mission of stern trawler/fish factory have been included. No item of purchase or labor performed has been included if they relate to the repair of previously existing equipment or the replacement of equipment with the same or similar components. All new equipment added was required as a result of the vessel's new service and where the size or type of the existing equipment would not suffice....It is the opinion of the Undersigned (i.e., Percy C. Overman, Nelson & Associates, Inc.) that the expenses noted above in the Recap paragraph could be reasonably attributed to the structural and mechanical modifications necessary to the conversion of this vessel from an oil field supply vessel to a stern trawler/factory vessel.

Further, the relief sought for certain supplies and materials was denied in the application for relief because the invoices presented did not indicate the country of origin. We are asked to review the dutiability of the following:

I. Aizawa Shipping Invoices

II. Marco Marine Invoices 338155, 338218, 338223, 338345, 339485 and Marco Order 13998.

III. Arya Marine Supply Invoices 15936, 15937, 15947, 15948, 15960, 15961, 15963, 15964, 15968, 15980, and 15990.

IV. Maritime Services Invoice, Item No. 8.

V. Key Marine Industries Invoice

VI. Esso Imperial Oil Invoice

ISSUES:

(1) Whether the work performed to the vessel while in a foreign shipyard constituted a modification to the vessel and is therefore not subject to duty under 19 U.S.C. 1466.

(2) Whether the costs for parts are dutiable under 19 U.S.C. 1466.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466, provides in pertinent part, for payment of an ad valorem duty of 50 percent on the cost of foreign parts purchased and foreign repairs to vessels documented under the laws of the United States to engage in the foreign or coastwise trade.

I. Aizawa Shipping Invoices

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.

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 non-dutiable 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.

After reviewing the entry documentation before us, along with the newly submitted evidence, we conclude that the costs listed on the Aizawa invoices are for non-dutiable modification work, with the following exceptions (the invoice numbers correspond to the Customs recap sheets):

Aizawa Invoices
#4 Hull outfitting work (old) - Work performed on an old section of the hull falls into the category of maintenance or repairs.

#6 Hull painting work (old) - Painting an existing portion of the vessel is in the nature of maintenance and is a dutiable repair.

#15 Machinery outfitting work (old) - (see #4 above.)

#18 Machinery painting work (old) - (see #6 above.)

#21b Item no. 4 - Spare Parts & Tools. You claim that this item is not dutiable under 19 U.S.C. 1466, because supplies consumed aboard the vessel are not dutiable. The invoice does not give any detail what these "spare parts and tools" consist of; therefore, this item is dutiable.

#22 Stock Less Anchor, Stud Link Chain. T.D. 40934. (equipment)

#32b Part D, item 5 - Spare Parts and tools. Again, the invoice lacks sufficient detail to consider this non-dutiable.

#36 Lamps (equipment)

#37 Pole Balance; Daixan (equipment)

#38a All items are dutiable as equipment, except: ch looker pump, ref cool sw pump, both factory bilge pumps, switch, both plug receptacles, and electric wire.

#40 All items are dutiable as equipment. The Nelson report indicates that items 3 and 4 ("coffee bean" and "fluid of juice") are, in fact, a coffee grinder and a juicer.

#41 All items are dutiable. (equipment)

#41a through 41j - All items are dutiable. (equipment)

#43b Items 23, 24, 26-33 are dutiable. (equipment)

#44 All items are dutiable. (equipment)

#46b Items 14 and 19 are dutiable. No additional evidence was presented in the protest to show what these items actually are.

#47 All items are dutiable. Painting existing portions of the hull and machinery is in the nature of maintenance (see #6 and 18 above); therefore, the paint used is dutiable as well.

In numerous items, you alternatively claim that they are free of duty either as products of U.S. origin, or that duty was previously paid and they would not be dutiable pursuant to section 1466(h)(2). We agree with the decision made in the application for relief, that 19 U.S.C. 1466(h), exempts from duty spare repair parts or materials that have been manufactured in the United States or entered the United States duty-paid and are used aboard a cargo vessel engaged in foreign or coasting trade. As discussed in Customs Ruling 111464, the Customs Service interprets the use of the term cargo to limit the exception contained in the statute to vessels whose sole service is the transportation of cargo and which are actually engaged in that service while documented for the foreign or coasting trade. The NORTHERN HERO, at the time of arrival, was a fish factory processor and consequently does not qualify for the exceptions contained in 19 U.S.C. 1466.

Failing qualification for the exceptions accorded to cargo vessels, we must evaluate your 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. 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 and purchased in the United States. See Headquarters Ruling Letter 110953, dated September 19, 1990. Absent such documentation, the material is deemed foreign and consequently is dutiable.

II. Marco Marine Co. Invoices

You seek relief for certain supplies and materials, contained in the Marco Marine invoices, because they are either: (1) consumable supplies, and/or (2) items of U.S. origin, and/or (3) foreign origin items with U.S. duty paid. We shall reiterate what was discussed in the application for relief: the exception provided by 19 U.S.C. 1466(h), only applies to cargo vessels. Therefore, the fact that duty was paid on a foreign origin item is irrelevant. To escape the payment of duty, the item must be of (1) U.S. origin (shown by written documentation by the equipment manufacturer that the equipment was manufactured in the United States), and (2) purchased in the United States (shown by a United States bill of sale). In the application for relief, Marco Marine attested that certain items were of U.S. origin. We agree that these items are not dutiable.

As to the life rafts in Marco invoice order 13998, Marco Marine attested that they are of Danish origin. Since life rafts are considered to be equipment, they are dutiable under 19 U.S.C. 1466(a), unless an exception applies. The only exception is 19 U.S.C. 1466(h), which applies to cargo vessels, or U.S. origin/U.S. purchased items. Because Marco did not attest that the items, listed in invoice 338155, 338218, 338223, 338345 and 339485 are U.S. origin items, and no further evidence has been presented in the protest, which you should know was necessary from a reading of Customs Ruling 111464, these items are dutiable as well. Further, we do not consider these items to be consumable supplies. As to your request to submit additional evidence, please see our discussion of 19 CFR 174.28, on page 1.

III. Arya Marine Supply Invoices

You claim that for those items which Customs considers dutiable, that they are either (1) consumable supplies, and/or (2) U.S. origin items, and/or (3) foreign origin U.S. duty paid items. We disagree with your claim for the same reasons as discussed above.

IV. Maritime Services Invoices

You claim that nautical charts are consumable supplies and are not dutiable. There is no basis for this argument. Customs has consistently held that nautical charts are considered a part of a vessel's equipment; therefore, they are dutiable. Customs Ruling 107782; MS 212.6C, May 11, 1967.

V. Key Marine Industries Ltd. Invoice

The electric motor is dutiable for the same reasons many items in the Marco invoices, discussed above, are dutiable.

VI. Esso Imperial Oil Invoices

We find that the absorbent pads and flannel rags are consumable supplies, which are not dutiable if not used to make repairs. As to the items listed on invoice 995739, we find that they are not duty free as part of the vessel's fuel costs.

HOLDING:

Most of the costs contained in the Aizawa Shipping Company invoices are not subject to duty under 19 U.S.C. 1466 because the work constituted a modification to the vessel.

The vessel does not qualify as a cargo vessel under 19 U.S.C. 1466(h). Consequently those parts not attested as U.S. origin are dutiable.

Sincerely,

B. James Fritz

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