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HQ 112202


May 20, 1992

VES-13-18-CO:R:IT:C 112202 LLB

CATEGORY: CARRIER

Deputy Assistant Regional Commissioner
Commercial Operations
ATTN: Regional Vessel Repair Liquidation Unit 423 Canal Street
New Orleans, Louisiana 70130-2341

RE: Vessel repair; Repairs; Modifications; Survey; Protest; Vessel OVERSEAS MARILYN; Protest number 1801-92-100004; Entry number C18-0016789-7

Dear Sir:

Reference is made to your memorandum of April 8, 1992, which forwards for our consideration the Protest from the assessment of vessel repair duties filed by counsel on behalf of the operators of the vessel OVERSEAS MARILYN. Duties were assessed in connection with the above-referenced vessel repair entry. The items associated with this entry have not previously been considered at Customs Headquarters.

FACTS:

The record reflects that the OVERSEAS MARILYN arrived in the port of Tampa, Florida, on November 14, 1990, filed a timely vessel repair entry, and supplemented that entry as required by the Customs Regulations. While abroad, the vessel underwent drydocking, repair, survey, and modification operations. Headquarters recommendations have been sought on a total of fifteen (15) invoice items. We will refer to our 1 to 15 numbering scheme in later discussing our findings. The fifteen items are:

1. Item 20 - Tailshaft inspection (seal replacement)

2. Item 24 - Anchor chain ranging (painting of shots)

3. Item 25 - Anchor windlass (claimed ABS/USCG inspection)

4. Item 27 - Gritblasting (staging cost)

5. Item 32 - Dwarf king post vents (staging cost)

6. Item 38 - Life boat inspection (steel pin renewal)

7. Item 39 - Main engine survey (crank bearing overhaul)

8. Item 40.01 - Transportation costs (no such item located)

9. Item 44 - Main engine cylinder relief valve (survey)

10. Item 45 - Main camshaft drive chain (claimed survey only)

11. Item 46 - Reversing motor (claimed survey only)

12. Item 49 - Main engine air coolers (plugs manufactured)

13. Item 52 - Generator uptake exhaust trunks bolted (staging)

14. Anchor chain kit (origin question)

15. ABS invoices (survey reports not provided)

ISSUE:

Whether the items under review constitute properly segregated non-dutiable operations due to association with modification or inspectional operations rather than repair services.

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.

In regard to the dutiability of ABS surveys it should be noted that Customs has held pursuant to C.S.D. 79-277 that where periodic surveys are undertaken to meet the specific requirements of a classification society, insurance carrier, etc., the cost of the survey is not dutiable even when dutiable repairs are effected as a result thereof. This is as distinguished from a survey, regardless of how titled, whose source is a carrier- initiated maintenance and repair or other program, scheduled or otherwise. Applicants seeking a nondutiable determination regarding ABS surveys must submit both the invoice and the corresponding report (Ruling Letter 110710). We note that there was no report accompanying the ABS invoice in this matter.

Customs has consistently held that where the charges for dutiable and non-dutiable items are not segregated within an invoice, all of the charges in that invoice must be deemed dutiable (Ruling Letter 108567). Among those items traditionally considered non-dutiable if properly segregated are the cost of staging and transportation.

The courts and Customs have held (See American Viking Corp. v. United States, C.D. 1830 (1956), and Customs Ruling Letter 104952, December 17, 1980), that the replacement of parts or materials which are necessarily destroyed during the course of an inspection where no repairs resulted, may be replaced without duty consequence under section 1466 (Ruling Letter 111185).

With specific reference to the items for which our review was requested, we find that items 1 and 14 are duty-free. Item 1 is for a non-repair inspection during which the seal was necessarily destroyed, and item 14 is shown (in the attachment to exhibit number 6) to be manufactured in Chester, Pennsylvania, and shipped from the United States. Portions of items 7 and 12 are subject to duty. These include the segregated costs of overhauling the crank bearing in 7 and the segregated cost of manufacturing shown in 12.

The balance of the items are considered subject to duty. In item 2, the chain shots were painted and are considered dutiable (Ruling Letter 111337). For items 3, 9, 10, and 11, there are no ABS reports in the file to substantiate the claims of connection with non-repair-related inspections only. In regard to numbers 4, 5, and 13, the listed staging costs are not segregated from other operations and are, therefore, dutiable. Item number 6 includes a renewal/manufacturing cost which is not segregated from otherwise non-dutiable operations, which renders the entirety of the item dutiable. Finally, item 15 is dutiable because there are no ABS survey reports accompanying the ABS invoices as required under the Customs precedential decision previously discussed.

HOLDING:

Following a thorough review of the evidence as well as analysis of the applicable law and precedents, we have determined that, for the reasons set forth in the Law and Analysis portion of this ruling, the Protest under consideration is allowed in part and denied in part.

Sincerely,

B. James Fritz

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