HQ 0112488 - Protest No. 3126-92-100005; Anchorage Vessel Repair Entry No. C31-0008394-9 dated September 28, 1990; M/V ARCTIC HERO V-1; Conversion; Modification; consumable supplies; sea stores; ship's stores; non-segregated cleaning operations; U.S. spare parts; 19 U.S.C 1466(h); 19 U.S.C 1446 - United States International Trade Commision Rulings

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HQ 112488

October 9, 1992

VES-13-18-CO:R:IT:C 112488 BEW

CATEGORY: CARRIER

Deputy Regional Director
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, California 90831-0700

RE: Protest No. 3126-92-100005; Anchorage Vessel Repair Entry No. C31-0008394-9 dated September 28, 1990; M/V ARCTIC HERO V-1; Conversion; Modification; consumable supplies; sea stores; ship's stores; non-segregated cleaning operations; U.S. spare parts; 19 U.S.C 1466(h); 19 U.S.C 1446

Dear Sir:

This is in response to a telephonic request from your office requesting a clarification of our ruling HQ 112143 dated July 9, 1992, on protest No. 3126-92-100005, relating to vessel repair entry No. C31-0008394-9, concerning the ARCTIC HERO, Voyage 1, which arrived at the port of Anchorage, Alaska, September 22, 1990. Specifically, your office requested a clarification as to our finding on the Aizawa Shipping Company invoice, page No. 21. Subsequent to your telephonic communication, on September 3, 1992, the protestant submitted additional documentation relating to this entry.

After a complete review and reconsideration of the protest and attached documents, and in accordance with section 177.9 of the Customs Regulations (19 CFR 177.9), we are hereby revoking Headquarters Ruling 112143 BEW, dated July 9, 1992, as to the said page No. 21. Accordingly, we are reissuing Headquarters Ruling HQ 112143 BEW as follows and assigning a new ruling number, HQ 112488:

FACTS:

The M/V ARCTIC HERO is a U.S.-flag vessel owned and operated by Palmco Pacific Corporation of Seattle, Washington. The protestant states that the subject vessel was converted from an oil rig supply vessel to a stern trawler head and gut fish factory processing vessel at the Murakami Shipyard in Ishinomaki, Japan, during the period of July 21, 1989 - July 9, 1990. Subsequent to the completion of this conversion work the vessel arrived in the United States at Dutch Harbor, Alaska, on September 22, 1990. A vessel repair entry was filed on September 28, 1990.
Pursuant to an authorized extension of time, an application for relief, dated December 18, 1990, was filed. The basis for the relief requested was that the conversion work in question constituted a nondutiable modification to the vessel. The conversion work purportedly entailed the following: (1) lengthening the vessel to create increased freezer storage space, a larger area for a processing deck and a longer net deck to repair and work the nets; (2) increasing the power, maneuverability and control standards of the propulsion system; (3) increasing the electrical and hydraulic power of the auxiliary engine systems to run processing, refrigeration and hydraulic machinery; (4) installation of a hydraulic system including hydraulic pumps, motors, and winches to operate the trawl net and to unload cargo; (5) installation of a processing plant to produce a marketable product; (6) installation of a refrigeration plant to freeze and preserve fish; and (7) increasing the number and size of all accommodation areas to house a substantially larger crew, including processing crewmen. The application for relief was denied on August 6, 1991 (HQ 111641 GEV), on the basis that:

... the Aizawa invoice descriptions do not enable us to determine conclusively that the work performed to the vessel is not dutiable as a modification. The invoices contain only the most general summary of the work carried out by the shipyard. Without details provided by the architectural plans and shipyard invoice descriptions of the work performed, we can only speculate on the actual work carried out. In the absence of such information, we find the costs contained in the Aizawa invoices to be dutiable with the exception of the charges for dockage on p. 1 (see C.I.E. 429/61) and domestic packing and freight on p. 19-A (see C.D. 1830).

The entry was liquidated on October 25, 1991. The protest was timely filed on January 22, 1992. The protestant claims that certain items contained in the Aizawa Shipping Company invoices are non-dutiable modifications. In support of the claim for relief various documentation including invoices, lease agreements, statements of corporate officers of Palmco Pacific Corporation, and prior Customs rulings were submitted. In addition, the protestant has submitted drawings (A-N) indicating the structural changes made to the vessel. The record shows that the Aizawa Shipping Company managed the conversions, which actually took place at Murakami Shipyards, Ishinomaki, Japan. The protestant has submitted the following new evidence: (1) drawings explaining the (a) "non-dutiable installation of the fish processing factory", (b) the "newly converted hull superimposed over the previously existing hull", (c) the removal and scrapping of the existing machinery components and replacement with new components required for the newly extended service, and (d) the modification of the existing hull which was required in order to accommodate the larger and more complex machinery components, trawl gear, fish factory equipment, freezer storage space and larger accommodations. 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 protest seeks relief for certain supplies and materials alleged to be U.S. spare parts. We are asked to review the dutiability of the following:

1. Aizawa Shipping Invoices

2. Marco Marine Invoice Nos. 337816, 337960, 338044, 338113, 338260, 338593, 338706, 338746, 338849, 338850, 338851, 338857, and 339041.

3. Hatch and Kirk Export Co., Inc. Invoice No. 10665209991-01

4. Steve Ewing's Diesel Service, Inc. Invoice No. 6094 5.The Falk Corporation Invoice Nos. 8973815 and 9074132

6. Stellar Industrial Supply Invoice No. 1030411-02

7. DEFCO Invoice No. 40422

ISSUE:

Whether the evidence presented is sufficient to prove that the foreign work performed on the subject vessel for which the protestant seeks relief constitutes modifications/alterations/ additions so as to render the work nondutiable 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 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 trade.

In its application of the vessel repair statute, Customs 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 modification/alteration/addition to the hull and fittings of a 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.

Customs has held that the installation of fish processing machinery is a non-dutiable modification to the hull and fittings of a vessel (see C.S.D. 83-35). It has held that whether the work entailed in converting a vessel from one operation to another is a nondutiable modification to the hull and fittings of the vessel will be determined according to the standards outlined above.

1. AIZAWA SHIPPING CO. LTD. INVOICE

With regard to the items of cost listed on the Aizawa invoice, the new evidence submitted demonstrates sufficiently that the conversion work performed on the vessel and the other work necessitated by the conversions are nondutiable modifications/alterations/additions to the hull and fittings of the vessel. Our findings are as follows:

Page No. 1 - All costs are non-dutiable except the cost associated with cleaning. Cleaning operations which remove rust and deterioration, and which are a necessary factor in the effective restoration of a vessel to its former state of preservation, constitute vessel repairs (See C.I.E. 429/61). Insofar as inspection and cleaning operations are concerned, Customs has long held the cost of 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; see C.I.E.'s 18/48, 125/48, 910/59, 820/60, 51/61, 429/61; 569/62, 698/62; C.D. 2514; T.D.'s 45001 and 49531. Pursuant to C.I.E. 1325/58 and C.I.E. 565/55, duties may not be remitted where the invoice does not segregate the dutiable costs from the non- dutiable costs. In the subject invoice, the cost for cleaning operations associated with the dutiable repairs is not segregated from cost of the cleaning operations associated with the nondutiable repairs. Accordingly, the protest is denied as to this item of cost.

Page Nos. 1A through 1N - All items of cost are associated with nondutiable modifications.
Page Nos. 2 through 6 and 8 through 20 - All items of cost are associated with nondutiable modifications.

Page No. 7 - Item Nos. 1 Studlink chain and 2. Stocklass anchors - In as much as these items are equipment the cost associated with them is dutiable.

Page No. 21 - Item No. 10 Fish Store Thermometer - based on additional evidence submitted September 3, 1992, we find this item to be a part of the fish factory modification. Accordingly, the cost associated with this item is nondutiable.

Page No. 21A - Item No. 39 Belt Conveyor System, Item No. 40 Fishhead Cutter, and Item No. 41 Binding Machine - based on additional evidence submitted September 3, 1992, we find these items to be a part of the fish factory modification. Accordingly, the costs associated with these items are nondutiable.

Pursuant to C.I.E. 196/60, consumable supplies which are used to effect repairs are dutiable. Consumable supplies and/or sea stores are distinguished from ship's stores in T.D. 22343 as follows:

.. 'ship's stores' embrace those articles which form 'part of the body, tackle, apparel, or furniture of a ship', being necessary for the ship itself... while "sea stores" include only such as are "intended for the health and sustenance of the crew or passengers," "all stores put on board for the purpose of consumption by the persons in the ship,"... T.D. 22433, August 9. 1900, quoting from United States v. Twenty-Four Coils of Cordage, 28 Fed. Cas. 276 (E.D. Pennsylvania, 1832).

With regard to the Aizawa invoice, page Nos. 21 through 27 we found as follows:

Page No. 21 - We held in Headquarters ruling 112179, dated May 6, 1992, relating to the sistership NORTHERN HERO (entry No. C31-0008307-1), based on the belief that the pumps described on page 38A were installed as nondutiable modifications, that the cost was not subject to duty. We note on review of this case that the same pumps were taken aboard as spares. It follows that these pumps were not made a part of the hull and fittings of the vessel, therefore, the costs of these pumps are subject to duty in both entries. With regard to the remaining items listed on page 21, we find these items to be dutiable as equipment, with the execption of Item No. 10 as stated above. Page Nos. 21A through 22 - All remaining items of cost, except those noted above, are dutiable as equipment.

Page No. 23 - The costs associated with the Coffee Machine and the Juice Dispenser Machine are dutiable as equipment. In as much as the coffee beans and the juice fluid are consumable supplies, the costs associated with these two items are nondutiable.

Page No. 24 through 24J - All items of cost are dutiable as equipment.

Page No. 25 - All items of cost are nondutiable consumable supplies.

Page No. 26 - All items of cost are dutiable as equipment.

Page No. 27 - All items of cost are nondutiable consumable supplies.

Page No. 28 - Hull paint (old) - all items of cost are dutiable. Painting existing portions of the hull and machinery is in the nature of maintenance; therefore, the paint used is dutiable as well.

Page No. 29 - hull paint (new) - all items of cost are nondutiable as a part of the modification repairs.

Pursuant to CIE 289/49, equipment leased in a foreign country for use on a vessel of the United States is not subject to the duty provisions of section 1466. Customs has ruled that equipment leased is not dutiable because section 1466 is expressly limited by its terms to equipment which is "purchased" during the foreign voyage. CIE 289/49 also held that the installation costs incurred in connection with the leasing of the aforementioned equipment are not dutiable.

With regard to Page Nos. 30 through 32 - Fitting and piping work associated with the equipment listed in the lease agreement is nondutiable for the reasons stated above.

With regard to the trawl nets, etc. listed in the lease agreement, these costs are nondutiable for the reasons stated above.

With regard to certain other invoices, you claim that certain items 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).
Title 19, United States Code, section 1466(h) (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 ARCTIC HERO, at the time of arrival, was or was intended to be used as a fish factory processor and consequently does not qualify for the exceptions contained in 19 U.S.C. 1466(h).

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.

2. Marco Marine Co. Invoices

You seek relief for certain supplies and materials mentioned 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. 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 Marine Co. invoice No. 338260, 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 has attested that the items listed in invoice Nos. 337816, 337960, 338044, 338113, 338593, 338706, 338746, 338849, 338850, 338851, 338857, and 339041 are U.S. origin items, we find these items to be nondutiable. All items on the Marco Marine invoices are nondutiable with the exception of the life rafts which are dutiable as equipment.

3. All remaining invoices

With regard to the following invoices, the record shows that each company has attested that the items listed on their respective invoices are of U.S. origin. Accordingly, the cost associated with these items are nondutiable.

Hatch and Kirk Export Co., Inc. Invoice No. 10665209991-01, Steve Ewing's Diesel Service, Inc. Invoice No. 6094, The Falk Corporation Invoice Nos. 8973815 and 9074132, Stellar Industrial Supply Invoice No. 1030411-02, DEFCO Invoice No. 40422.

HOLDING:

The evidence presented is sufficient to prove that the foreign work performed on the subject vessel for which the protestant seeks relief constitutes modifications/alterations/ additions so as to render the work nondutiable under 19 U.S.C. 1466. Accordingly, the charges listed on the Aizawa Shipping Co., Ltd. invoices under consideration are nondutiable with the exception of those items discussed above.

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.

The protest is granted in part and denied in part as set forth above.

Sincerely,

Stuart P. Seidel

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