HQ 0111899 - Vessel Repair Entry No. C15-0012302-6; S/S NANCY LYKES V-114; Surveys; U.S. Parts - United States International Trade Commision Rulings

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HQ 111899

August 14, 1992

VES-13-18-CO:R:IT:C 111899 GEV

CATEGORY: CARRIER

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

RE: Vessel Repair Entry No. C15-0012302-6; S/S NANCY LYKES V-114; Surveys; U.S. Parts

Dear Sir:

This is in reference to your memorandum dated September 6, 1991, forwarding an application for relief from duties assessed pursuant to 19 U.S.C. 1466. Our findings are set forth below.

FACTS:

The S/S NANCY LYKES is a U.S.-flag vessel owned by Lykes Brothers Steamship Co. of New Orleans, Louisiana. The subject vessel had foreign shipyard work performed during the period of November 26 - December 29, 1990. Subsequent to the completion of the work the vessel arrived in the United States at Wilmington, North Carolina on February 3, 1991. A vessel repair entry was filed on February 4, 1991.

Pursuant to an authorized extension of time, an application for relief, dated April 24, 1991, was timely filed. Further documentation was submitted pursuant to a request from Customs New Orleans Vessel Repair Liquidation Unit (VRLU). The applicant contends that various surveys conducted by the American Bureau of Shipping (ABS) and radar repairs using U.S. parts and labor are nondutiable. In support of these claims the applicant has submitted U.S. invoices covering parts and accompanying freight and delivery charges, documentation (i.e., invoices and reports) from the ABS, and evidence of U.S. labor.

ISSUES:

1. Whether evidence is presented sufficient to prove that vessel parts and/or materials were purchased in the United States and shipped foreign for installation aboard a U.S.-flag vessel thereby exempting them from duty pursuant to 19 U.S.C. 1466(h).

2. Whether the cost of certain surveys conducted by the American Bureau of Shipping (ABS) for which the applicant seeks relief are dutiable pursuant to 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.

The Customs and Trade Act of 1990 (Pub. L. 101-382) which amends 19 U.S.C. 1466, exempts from duty under the statute, the cost of spare repair parts or materials which have been previously imported into the United States as commodities with applicable duty paid under the Harmonized Tariff Schedule of the United States (HTSUS). The amendment specifies that the owner or master must provide a certification that the materials were imported with the intent that they be installed on a cargo vessel documented for and engaged in the foreign or coasting trade.

The certification required by 19 U.S.C. 1466(h)(2) as to the vessel's documentation (foreign or coasting trades) and service, will be made by the master on the vessel repair entry (CF 226) at the time of arrival. The fact of payment of duty under the HTSUS for a particular part must be evidenced as follows. 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 CF 226. In cases in which the vessel operator has purchased imported materials from a third party in the United States, a bill of sale for the materials shall constitute sufficient proof of prior importation and HTSUS duty payment. This evidence of proof of importation and payment of duty must be presented to escape duty and any other applicable consequences.

In addition, we require certification on the CF 226 or an accompanying document by a person with direct knowledge of the fact that an article was imported for the purpose of either then- existing or intended future installation on a company's vessels. Ordinarily, the vessel's master would not have direct knowledge of that fact, and an agent may also be without such knowledge.

Customs has in the past linked this duty remission provision to the duty assessment provision in subsection (a) of the statute. In the face of argument to the contrary we have held that a two-part test must be met in order for remission of duty to be granted: first, that the article must be of U.S. manufacture; and, second, it must be installed by a U.S.-resident or regular vessel crew labor. The reason for this position is that (d)(2) refers to "such equipments or parts...", etc., without any other logical placement for the word "such" occurring in that subsection. We inferred that "such" articles must refer to those installed under subsection (a), absent any other reasonable predication. The new amendment puts this issue to rest; it is clear that as concerns foreign-made parts imported for consumption and then installed on U.S. vessels abroad, the labor required for their installation is separately dutiable. A part may now be considered exempt from vessel repair duty albeit the foreign labor cost is dutiable.

Uniform treatment will be accorded to parts sent from the United States for use in vessel repairs abroad, regardless of whether they are proven to be produced in the U.S., or have been proven to have been imported and entered for consumption with duty paid. In both cases, the cost of the materials is duty exempt and only the cost of foreign labor necessary to install them is subject to duty. Crew member or U.S.-resident labor continues to be free of duty when warranted.

The effective date of this amendment makes this section applicable to any entry made before the date of enactment of this Act that is not "finally liquidated" (i.e., for which a timely protest was filed or court action initiated) on the date of enactment of this Act, and any entry made--

(A) on or after the date of enactment of this Act, and
(B) on or before December 31, 1992.

Since the subject entry has not been "finally liquidated" as noted above, the new section 1466(h) is applicable to this entry as it relates to spare parts.

In regard to the documentation contained in the application, we note that although U.S. invoices covering parts and materials have been submitted, the requisite certifications are not contained in the record. Absent these certifications, or proof that any of the parts and materials were manufactured in the United States, relief pursuant to section 1466(h) is denied.

It should be noted that the invoices from Mackay Communications sent by the applicant in response to a letter from the New Orleans VRLU, dated July 2, 1991, which purportedly establish U.S. origin are insufficient evidence of U.S. manufacture. They merely evidence shipment of the parts. Furthermore, there is a notation on page 2 of order no. 72002 which states, "X) COUNTRY OF ORIGIN NORWAY EXCEPT FOR POS. 1 A AND 1 B ORIGIN USA." Accordingly, this documentation does not establish that the parts in question are of U.S. manufacture so as to abrogate the certification requirements of section 1466(h).

Further in regard to the radar repairs discussed above, we note that they were not declared and entered on the CF 226 submitted by the applicant as required by 19 CFR 4.14(b)(1) and (2). Appropriate penalty action should therefore be initiated.

In regard to the dutiability of the ABS surveys in question, we note that 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, we 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). n It is important to note that only the cost of opening the crane was exempted from duty 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, we note that after reviewing the record in its entirety, the ABS surveys for which relief is requested are within the class of nondutiable surveys discussed above. Accordingly, the costs of the surveys are nondutiable.

HOLDINGS:

1. Vessel parts and materials purchased in the United States and shipped foreign for installation aboard a U.S.-flag vessel are exempted from duty pursuant to 19 U.S.C. 1466(h), provided the requisite evidentiary documentation is submitted.

Accordingly, with respect to the application under consideration, relief should be granted for those parts and materials covered by U.S. invoices if the required certifications are submitted, or proof is submitted that the parts and materials were manufactured in the United States. n 2. The cost of certain surveys conducted by the American Bureau of Shipping for which the applicant seeks relief are not dutiable pursuant to 19 U.S.C. 1466.

Sincerely,

B. James Fritz

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