HQ 0112513 - Vessel Repair; Modification; Application; Segregation of Costs; Documentation; Evidence; Inspection; Testing; Propeller; Transportation; 19 U.S.C. 1466; ALASKA V-I; Entry No. H24-0013047-0. - United States International Trade Commision Rulings

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HQ 112513

March 30, 1993

VES-13-18 CO:R:IT:C 112513 GFM

CATEGORY: CARRIER

Chief, Technical Branch
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831

RE: Vessel Repair; Modification; Application; Segregation of Costs; Documentation; Evidence; Inspection; Testing; Propeller; Transportation; 19 U.S.C. 1466; ALASKA V-I; Entry No. H24-0013047-0.

Dear Sir:

This letter is in response to your memorandum dated November 3, 1992, which forwards for our review the application for relief filed in conjunction with the above-referenced vessel repair entry.

FACTS:

The vessel ALASKA V-I arrived at the port of Anchorage, Alaska, on April 9, 1992, and filed a timely vessel repair entry. The entry indicates that the vessel underwent foreign shipyard work in Tokyo, Japan. This application seeks relief from duty for various inspection, cleaning, repair, and modification charges incurred during vessel's dockage at said foreign shipyards.

ISSUE:

Whether the cost of foreign shipyard work completed aboard the subject vessel is 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 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.

Many of the transactions listed in the submitted invoice are claimed to be duty-free 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 non-dutiable 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.

HULL PART
Item 13 Cooling Coil Replacement...............? 2,200,000.

This item represents charges for "replacing [the] cooling coil of the entire fish hold, replac[ing] side sparring, and replac[ing] grating." As this item involves the replacement of existing equipment, it is considered to be a dutiable repair.

HULL PART
Item 14 Painting Works for Outer Hull..........? 125,000. Item 15 Painting Works for Hull Bottom.........? 200,000. Item 16 Painting of Ship's Name................? 70,000. Item 17 Painting Works for Exposed Structure...? 120,000.

These items involve various painting operations performed aboard the vessel. In C.I.E. 518/63, it was held that the application of a protective and preservative coating to a vessel's tanks, the charges for labor for erection and use of equipment, the cleaning incidental thereto, and all materials used in connection with such operations are dutiable as repairs. Pursuant to C.D. 1430 (41 CCPA 57, C.A.D. 529), painting that is strictly ornamental and in no sense performed for the preservation of the vessel, cannot be considered "maintenance painting." With respect to the above items, as the painting performed pursuant to item 16 was ornamental in nature, it is entitled to remission. The painting performed pursuant to the remaining items, however, are dutiable as repairs.

HULL PART
Item 17 Miscellaneous Works....................? 500,000.

This item contains charges for the removal and disposal of insulation, the installation of a head cutter and the reinstallation of an otter board. As these activities are tantamount to repair operations, the cost of the item (? 500,000.) is dutiable.

MACHINERY PART
Item 1 Modification of Propeller...............? 2,970,000.

This item involves charges for removal, cleaning, and maintenance of the vessel's propeller. Cleaning operations which remove rust and deterioration or worn parts, 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). 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. 919/60 remission of duty assessed on the cost or repairs is not warranted under section 1466 where the repairs are maintenance in nature. With regard to this item, it is quite clear that the work performed was related to maintenance operations. Accordingly, the cost of the item (? 2,970,000.) is dutiable.

MACHINERY PART
Item 3 Modification of Reduction Gear..........? 2,420,000.

This item involves charges for removal, cleaning, and maintenance of the vessel's reduction gears. As stated, cleaning operations which remove rust and deterioration or worn parts, 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). 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. 919/60 remission of duty assessed on the cost or repairs is not warranted under section 1466 where the repairs are maintenance in nature. With regard to this item, it is also quite clear that the work performed was related to maintenance operations. Accordingly, the cost of the item (? 2,420,000.) is dutiable.

ELECTRIC PART
Item 6 Navigation Light........................? 700,000.

This item represents charges for "cut[ting] off the cable between the aft. anchor light due to poor working of the terminal and * * * replac[ing] the light." In accordance with previously stated authority, these operations represent dutiable repairs. Accordingly, the entire cost of the item (? 700,000) is dutiable.

NAVIGATION EQUIPMENT
Item 2 Miscellaneous Expenses..................? 580,000.

This item contains unsegregated charges for "transportation expenses, expenditure spent during the work at site, and entering and utilization of the dockyard" which are related to dutiable transactions. Of these activities, only transportation costs are considered non-dutiable, provided however, that the costs for such are segregated. Here, as no segregation is made, the cost of the entire item (? 580,000.) is dutiable.

Finally, after reviewing the invoice and supporting documentation, where submitted, we have concluded that the items listed below do not provide sufficient descriptions to establish whether the work performed constitutes a modification to the vessel; accordingly, each is dutiable:

HULL PART

NKK Shimizu Item 10, Hull Piping Works, page 4: ? 11,450,000.

MACHINERY PART

NKK Shimizu Item 3, Mod. of Reduct. Gear, page 4: ? 2,420,000. NKK Shimizu Item 6, Change Hydraulic Pump, page 4: ? 470,000. NKK Shimizu Item 7, Bilge Treatment, page 4: ? 300,000.

ELECTRIC PART

NKK Shimizu Item 4, Works for Fish Finder, page 2: ? 604,000. NKK Shimizu Item 5, General Alarm, page 2: ? 1,500,000.

BELT CONVEYOR

NKK Shimizu Items 1-5, Mod. of Conveyor, page 1: ? 3,580,000.

REFRIGERATION PART

NKK Shimizu Items 1-6, Refrigeration, page 1: ? 7,060,000.

HOLDING:

After thorough review of the evidence presented, and as detailed in the Law and Analysis portion of this ruling, the application for relief is granted in part and denied in part.

Sincerely,

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