HQ 0112419 - Vessel Repair; Modifications; Inspection; Cleaning; 19 U.S.C. 1466; ALASKA RANGER; Entry No. H24-0009857-8. - United States International Trade Commision Rulings

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HQ 112419

February 22,1993

VES-13-18 CO:R:IT:C 112419 JBW

CATEGORY: CARRIER

Deputy Regional Director
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831

RE: Vessel Repair; Modifications; Inspection; Cleaning; 19 U.S.C. 1466; ALASKA RANGER; Entry No. H24-0009857-8.

Dear Sir:

This letter is in response to your memorandum that forwards for our review the application for relief filed in conjunction with the above-referenced vessel repair entry.

FACTS:

The record reflects that the subject vessel, the ALASKA RANGER, arrived at the port of Anchorage, Alaska, on November 8, 1990. Vessel repair entry, number H24-0009857-8, was filed on the same day as arrival and indicated that work was performed on the vessel in Ishinomaki City, Japan. The applicant seeks relief for certain costs that it claims are not subject to duty as modifications. The applicant also seeks relief for other items it has identified as costs related to inspections and cleaning.

ISSUES:

(1) Whether certain work performed to the vessel resulted in modifications to the vessel and is therefore not subject to duty under 19 U.S.C. 1466.

(2) Whether the shipyard costs associated with inspections carried out by qualifying inspection entities are subject to duty under 19 U.S.C. 1466.

(3) Whether cleaning operations performed in conjunction with both modifications and repairs are subject to duty 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 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.

I. Modification of the Vessel.

In its application of the vessel repair statute, the Customs Service 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.

The Customs Service has 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.

The applicant has submitted the Yamanishi Shipbuilding and Iron Works, Ltd., invoice to establish the modifications it claims were performed to the vessel. We find the descriptions contained in the invoice to be problematic, for the items, for the most part, fail to describe in detail the work actually performed and are phrased as legal conclusions. We have reviewed the invoice and supporting documentation, where submitted, and have concluded that the following items do not provide sufficient descriptions to establish whether the work performed constitutes a modification to the vessel:

Yamanishi Invoice Item 5, page 2
Yamanishi Invoice Item 7, page 2
Yamanishi Invoice Item 10, page 3
Yamanishi Invoice Item 13, page 3
Yamanishi Invoice Item 14, page 4
Yamanishi Invoice Item 15, page 4
Yamanishi Invoice Item 18, page 5
Yamanishi Invoice Item 19, page 5
Yamanishi Invoice Item 27, page 6
Yamanishi Invoice Item 32, page 7
Yamanishi Invoice Item 10, page 11
Yamanishi Invoice Item 11, page 11
Yamanishi Invoice Item 14, page 12
Yamanishi Invoice Item 16, page 12
Yamanishi Invoice Item 17, page 12
Yamanishi Invoice Item 25, page 13
Yamanishi Invoice Item 26, page 13
Yamanishi Invoice Item 27, page 13
Yamanishi Invoice Item 28, page 13

We find the remainder of the items identified by the applicant as modifications that are free of duty under 19 U.S.C. 1466.

II. Inspection.

The Customs Service has held that where periodic surveys are undertaken to meet the specific requirements of a governmental entity, a classification society, or insurance carrier, the cost of the surveys is not dutiable even when dutiable repairs are effected as a result thereof. Headquarters Ruling Letter 110368, dated July 26, 1989. In a recent case, we emphasized that this interpretation exempts from duty only the cost of a required scheduled inspection by a qualifying entity. Headquarters Ruling Letter 111328, dated August 7, 1991. If, however, the survey is to ascertain the extent of damage sustained or whether repairs are deemed necessary, 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). In the liquidation process, Customs should look beyond the mere labels of "continuous" or "ongoing" before deciding whether the item is dutiable. If an inspection or a survey is conducted as a part of a maintenance and repair program labelled "continuous" or "ongoing," the cost of such survey is dutiable if it is in fact repair related.

Yamanishi Invoice Items 41 and 43 contain costs associated with inspections carried out by the American Bureau of Shipping. Item 41 details work required to access certain parts of the ship. No repairs were carried out as part of the inspection. The costs appearing in Item 41 are therefore not dutiable. Item 43 details work required for establishing load line marking, measuring shell plate thickness, preparing the vessel for the "inclining test," and repairing bulkheads. We determine that the first three of these tests were not associated with repairs and are not subject to duty. However, Item 43(d) relates to repairs of the bulkheads and is subject to duty.

III. Cleaning.

The applicant seeks relief for cleaning costs as identified in Item 39. The description under this item reads: "Clean all interior of vessel." The Customs Service has consistently held that cleaning is not dutiable unless it is performed as part of, in preparation for, or in conjunction with dutiable repairs or is an integral part of the overall maintenance of the vessel. E.g., Headquarters Ruling Letter 110841, dated May 29, 1990 (and cases cited therein). Both modifications and repairs were made to the interior of the vessel. The cleaning, therefore, was in part in preparation for dutiable repairs. We cannot determine from the invoice how those costs are apportioned. We therefore find the cleaning costs under Item 39 to be dutiable.

HOLDING:

Following a thorough review of the evidence submitted as well as an analysis of the applicable law and precedents, we have determined that the Application for Review should be allowed in part and denied in part as set forth in the Law and Analysis section of this ruling.

Sincerely,

Acting Chief

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