HQ 0112507 - Vessel Repair; Transportation; Segregated Invoice Costs; Survey; Modification; Cleaning; 19 U.S.C. 1466; SEA-LAND DISCOVERY, v-41; Entry No. 110-0104186-9; Petition for Review. - United States International Trade Commision Rulings

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HQ 112507

May 26, 1993

VES-13-18 CO:R:IT:C 112507 JBW

CATEGORY: CARRIER

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

RE: Vessel Repair; Transportation; Segregated Invoice Costs; Survey; Modification; Cleaning; 19 U.S.C. 1466; SEA-LAND DISCOVERY, v-41; Entry No. 110-0104186-9; Petition for Review.

Dear Sir:

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

FACTS:

The record reflects that the subject vessel, the SEA-LAND DISCOVERY, arrived at the port of Tacoma, Washington, on August 19, 1991. Vessel repair entry, number 110-0104186-9, was filed on August 23, 1991. The entry indicates that the vessel underwent extensive foreign shipyard work. An application for relief was filed and was allowed in part and denied in part. Headquarters Ruling Letter 112211, dated July 6, 1992. The petitioner now seeks relief from duty for certain costs found to be dutiable in the application.

ISSUE:

Whether the foreign work performed on the subject vessel for which the petitioner seeks relief is dutiable 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. UNITED STATES PARTS

The vessel repair statute 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. 19 U.S.C. 1466(h). For purposes of this section, where a part is purchased from a party unrelated to the vessel owner, a United States bill of sale constitutes sufficient evidence to demonstrate that the part was either manufactured in the United States or entered in the United States, duty-paid. 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 Customs Form 226.

The petitioner's claim for relief for parts that it asserts were manufactured in the United States was denied in the application for failing to provide evidence to establish the country of manufacture (Item 100). With regard to the six inch globe valve, the petitioner now submits a United States bill of sale to establish United States manufacture. This part had been used on and removed from another vessel and subsequently returned to the United States for repair by the manufacturer. Following repair, the part was sent to the SEA-LAND DISCOVERY for installation. The documentation submitted that establishes the manufacture and repair of the part in the United States is sufficient to meet the exemption provided under 19 U.S.C. 1466(h). The cost of this part is therefore not subject to duty.

Two other parts appear on Invoice Item 100 that the petitioner claims were manufactured in the United States. The petitioner submits a United States bill of sale (AMS Invoice 3335). The cost of these parts is likewise not subject to vessel repair duty.

II. WORK PERFORMED IN THE UNITED STATES

Claims for relief for two items, 105 and 140, were denied in the application as foreign charges. The statute assesses duty on the cost of foreign repairs. The evidence submitted as part of the petition establishes that the work was in fact performed in the United States. The cost of these items is therefore not subject to duty.

III. INSPECTION AND SURVEYS

The petitioner seeks relief for numerous items that it identifies as non-dutiable surveys. 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.

Under this authority, we find the following items to be required surveys that are not subject to duty:

Item 180-4.1002 D.C. Heater Mounts
Item 202 DI-6903 Drydock Survey
Item 202 DI-6902 Tailshaft Survey
Item 202 DI-0176 Annual Hull/Machinery
Item 202 DI-0176 Intermediate Survey
Item 202 DI-0176 Year of Grace Survey
Item 202 DI-6903 Special Hull Survey No. 5 Item 202 DI-0176 Annual Preventative Maintenance Item 202 SG-71634-H Special Cont. Sur. of Machinery and Electrical Equipment

Item 161 represents charges for the inspection services of a marine engineer as required by the petitioner's insurance carrier. As such, the inspection is a required inspection, the cost of which is not subject to duty under 19 U.S.C. 1466.

Item 180-4.1022 reflects costs for the opening and removal of tube bundles from the main lube oil coolers. This item was originally held dutiable for failure to segregate the cost of renewal of engineering zincs from the non-dutiable inspection costs. The petitioner has now submitted a segregated invoice. The inspection related costs appearing under this item are not subject to duty.

Item 180-5.2155 represents charges for x-rays that were required by the American Bureau of Shipping inspector for the special hull survey. No repairs were made. This cost is associated with a required survey and is therefore not subject to duty.

Item 202 DI-0176, Modification Survey, does not appear to be a required survey. It is, however, not subject to duty as part of the modifications performed.

The Petitioner also seeks relief for the cost of certain inspections where no repairs resulted from the inspections. In some instances, gaskets, seals, or other packing materials were destroyed when areas were opened for inspection. The Customs Service has held that inspections not resulting in repairs are not dutiable. Headquarters Ruling Letter 110395, dated September 7, 1989; see American Viking Corp. v. United States, 37 Cust. Ct. 237, 247, C.D. 1830 (1956). Further, the Customs Service has held that articles necessarily destroyed in the course of opening an area for inspection may be replaced without duty consequences. Headquarters Ruling Letter 109349, dated July 15, 1988; American Viking Corp., 37 Cust. Ct. at 247.

The following items were identified as parts destroyed to permit inspection and are not subject to duty:

Item 180-4.1006 H/P Turbine Gasket
Item 180-4.1007 L/P Turbine Gasket
Item 180-4.1019 P/S Boiler Mounting
Item 180-5.2009 No. 1 & 2 Fuel Oil Heaters Item 256-2.1013 Prop., Outer Seal & T/Shft Ex. Item 256-2.10132 Reassembled Seal Assembly Item 273 DI-6905 Seal Servicing

IV. MODIFICATIONS

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.

After reviewing the evidence regarding the specific items submitted for our consideration, we find that the following items are modifications that are not subject to duty:

Item 180-5.1050 Main Deck Bunker and Shore Service Item 180-5.2005 Reserve Feed Tanks
Item 180-Deep 5 Tank Modification
Item 180-CD New New Cofferdam

V. CLEANING

The petitioner seeks relief for the cleaning of the fuel oil tanks. The Customs Service has 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). The petitioner acknowledges that the following tank cleanings were in preparation for repairs. The costs appearing under these items are subject to duty:

Item 193 D1-0156 Item 198 D1-0164
Item 224 D1-0211 Item 236 D1-0226
Item 256 D1-6833

The costs appearing under Item 181 D1-0113 and Item 188 D1- 0131 represent costs for cleaning the fuel oil tanks for inspection. As noted in the previous paragraph, these tanks underwent further cleaning for repair. In discussing the dutiability of inspection costs, we stated that only the cost of a required inspection is exempt from duty. Where dutiable repairs follow such inspections, the costs that would have been incurred to effect the repairs notwithstanding the inspection are subject to duty. The costs incurred to prepare the fuel oil tanks for inspection were necessary both to allow the inspection and to carry out the repairs. The costs appearing under Item 181 D1-0113 and Item 188 D1-0131 are consequently subject to duty.

VI. SEGREGATION OF TRANSPORTATION CHARGES

In ruling on the application, we determined that certain non- dutiable transportation charges were subject to duty because they were not properly segregated from other dutiable charges. The petitioner has now filed amended invoices that breakout the transportation charges. We conclude that the following costs are not subject to duty:

Item 274-5.10182 Item 180-5.10182
Item 174-5.10192 Item 180-5.10191 ($550 not dutiable) Item 256-2.1015

The following items represent costs that the petitioner acknowledges are subject to duty:

Item 274-5.10181 Item 180-5.10181
Item 174-5.10191 Item 180-5.10191 ($4,550 dutiable) Item 256-2.10133

VII. CONSUMABLE SUPPLY

The petitioner seeks relief for the purchase of de-ionized water used when initially lighting the boilers after the drydocking and for human consumption. After the vessel is underway, it can make its own distilled water.

"Consumable supplies" are generally defined as supplies for the consumption, sustenance, and medical needs of the crew and passengers during a voyage. C.I.E. 1759/56. Consumable supplies generally are not subject to vessel repair duty unless used in effecting dutiable repairs. C.I.E. 196/60. The water under consideration was not used in effecting repairs; rather, the water is used only to permit the vessel to regenerate power to permit the vessel to get underway. Such use qualifies the water as a consumable supply. The cost of the water is therefore not subject to duty.

HOLDING:

Following a thorough review of the facts in this case as well as an analysis of the law and applicable precedents that bear upon those facts, we have determined that the Petition for Review should be granted in part and denied in part for the reasons set forth in the Law and Analysis section of this ruling. The petitioner should be informed of the right to file a Protest following liquidation of this entry, as evidenced by the posting of the bulletin notice of liquidation.

Sincerely,

Stuart P. Seidel

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