HQ 0112714 - Vessel Repair; Petition for Review; Modification; Inspections; Spare Parts; - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1993 HQ Rulings > HQ 0112665 - HQ 0221377 > HQ 0112714

HQ 112714

June 28, 1993

VES-13-18-CO:R:IT:C 112714 DEC

CATEGORY: CARRIER

Deputy Assistant Regional Commissioner
Classification and Value Division
Attention: Residual Liquidation and Protest Branch New York, New York 10048-0945

RE: Vessel Repair; Petition for Review; Modification; Inspections; Spare Parts;
Vessel Repair Entry: 85-385-574-5
Date of Arrival: July 4, 1983
Port of Arrival: Boston, Massachusetts
Vessel: S.S. MORMACSKY

Dear Sir:

This is in response to your communication with the Carrier Rulings Branch which forwards the petition for relief from vessel repair duties in connection with the above-referenced vessel for our review.

FACTS:

The S.S. MORMACSKY is owned and operated by the Moore McCormack Marine Group (formerly known as Marine McCormack Bulk Transport, Incorporated). The items that are the subject of this petition stem from various operations that were performed while the vessel was in The Netherlands. The following items have been submitted for our review:

1. Satellite Communications System
2. Consumable Items/Items Purchased in the U.S. 3. Segregated Costs for Required Inspections 4. Improvements Foreign Labor Costs

ISSUE:

Whether the cost of foreign shipyard work completed aboard the subject vessel is dutiable pursuant to Title 19, United States Code, section 1466.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466(a) provides, in pertinent part, for payment of a fifty percent ad valorem duty on the cost of foreign repairs to a vessel documented under United States law to engage in the foreign or coastwise trade, or to a vessel intended to be employed in such trade.

Satellite Communication System
(Invoice BT 219-105)

The petitioner contends that duty with respect to this item should be remitted because it is a modification since it is permanently incorporated into the vessel. Over the course of years, the identification of modification processes has evolved from judicial and administrative precedents. 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.

(2) Whether the item under consideration would remain aboard a vessel during an extended layup.

(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.

Before an item is to be construed as a part of the vessel, it must be (1) a permanent attachment and (2) essential to the successful operation of the vessel. Otte v. United States, 7 C.C.P.A. 166, 169 (1916).

To support its contention that the satellite communication system is a permanent incorporation into the vessel, the petitioner has submitted evidence in the form of letters from the satellite communications system's vendor as well as a letter from Captain William McManus, former Director of Marine Operations for the now defunct U.S. Lines, Inc. Both attest to the fact that this communication system, once installed, becomes permanently affixed to the vessel and is not, ordinarily, removed when the vessel is
placed in extended lay-up. Customs is satisfied that the petitioner has met its burden of proving that this item is a modification. Accordingly, duty is remitted with respect to this item.

Consumable Items
(P.O. #T01362)

The petitioner contends that the tank anodes constitute consumable items and should be accorded duty-free treatment. Alternatively, the applicant suggests duty-free treatment is appropriate for the tank anodes because they were purchased in the U.S. The tank anodes are installed in the vessel's ballast tanks and are designed to release ions into the ballast water to slow the process of corrosion. According to the submitted documents, a shipyard contractor installed the tank anodes (T01362) which are designed to last from three and one-half to four years.

On August 20, 1990, the President signed into law Pub. L. 101- 382, section 484E of which amends section 466, Tariff Act of 1930, as amended (19 U.S.C. 1466), by adding a new paragraph (h) to the statute 19 U.S.C. 1466(h).

Section 1466(h) provides in pertinent part that:

(h) The duty imposed by subsection (a) of this section shall not apply to--

(2) the cost of spare repair parts or materials (other than nets or nettings) which the owner or master of the vessel certifies are intended for use aboard a cargo vessel, documented under the laws of the United States and engaged in the foreign or coasting trade, for installation or use on such vessel, as needed, in the United States, at sea, or in a foreign country, but only if duty is paid under appropriate commodity classifications of the Harmonized Tariff Schedule of the United States upon first entry into the United States of each such spare part purchased in, or imported from, a foreign country.

While section 1466(h) applies by its terms only to foreign- made imported parts, there is ample reason to extend its effect to U.S.-made materials as well. To fail to do so would act to discourage the use of U.S.-made materials in effecting foreign repairs since continued linkage of remission provisions of subsection (d)(2) with the assessment provisions of subsection (a) of section 1466 would obligate operators to pay duty on such materials unless they were installed by crew or resident labor.

If an article is claimed to be of U.S. manufacture, there must be proof of its origin in the form of a bill of sale or domestic invoice. If a foreign manufactured article is claimed to have been previously entered for consumption, duty paid by the vessel operator, there must be proof of this fact in the form of a reference to the consumption entry number for that previous importation, as well as to the U.S. port of importation. If imported articles are purchased in the United States from a party unrelated to the vessel operator, a domestic bill of sale to the vessel operator must be presented.

Further, with regard to imported articles, there must be presented a certification on the CF 226 or an accompanying document by a person with direct knowledge of the fact that an article was imported or purchased for the purpose of either then-existing or intended future installation on a company vessel. Ordinarily, the vessel's master would not have direct knowledge of that fact, and an agent may also be without such knowledge. The second certification required by 19 U.S.C. 1466(h)(2) as to the vessel's documentation (foreign or coasting trades) and service (cargo vessel), will be made by the master on the vessel repair entry (CF 226) at the time of arrival.

If the elements stated above are proven to the satisfaction of the Customs Service, the cost of foreign labor utilized for the installation of U.S.-made or previously imported articles will be subject to duty under section 1466 in matters concerning repairs, and only the cost of qualifying materials used in repairs will be free of duty.

This section (19 U.S.C. 1466(h)) applies to entries that were made before the date of enactment (August 20, 1990)) that have not been liquidated. Consequently, the petitioner's claim for relief from vessel repair duties is, appropriately, considered in light of the provisions contained within 19 U.S.C. 1466(h).

A U.S. bill of sale has been submitted from the parts manufacturer indicating that the parts are U.S. made. Therefore, the costs associated with this invoice pertaining to the spare parts are not subject to duty to the extent that the invoice does not contain a charge for the labor associated with the installation of the anodes. The cost of the foreign labor used to install the anodes is dutiable.

Segregation of Costs for Required Inspections (Invoice BT 219-295)

The petitioner contends that the duty on the cost of regulatory required inspections should be remitted. Accordingly, the petitioner has presented U.S. Customs with a breakdown of the various items identifying both inspection and repair costs as follows.

Amounts in DFL Total Repairs Survey

Boiler Valves 11,820 8,000 3,820
Hydro Test 30,430 26,000 4,430
P/S Boilers 13,170 3,780 9,390
DC Heater 5,700 2,860 2,840
Cargo Gear 8,080 1,080 7,000
69,200 41,720 27,480
@2.8444 Rate= $24,328 $14,667 $9,661

In C.S.D. 79-277, the Customs Service addressed the dutiability of surveys/inspections stating that "[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.

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 ABS). 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.

Following the rule set forth above, the Customs Service finds that the surveys with respect to the Boiler Valves, Hydro Test, P/S Boilers, and DC Heater were required scheduled surveys and, therefore, not dutiable. It is clear on the face of these invoices that the surveys were for regulatory inspection and the petitioner has provided adequate proof of the survey costs. The separately itemized repair costs remain dutiable.

The last item's (Cargo Gear) segregated survey cost is not substantiated in the accompanying documentation. Accordingly, the entire amount of this invoice remains dutiable. While segregated nondutiable items may be remitted if separately itemized, the subject invoice and related documentation offered no evidence of a sufficiently established segregated cost for a scheduled required survey. Absent this requisite documentation, this item is dutiable.

Improvements Foreign Labor Costs
(BT219-296 B,C, & D)

The petitioner maintains that the duty associated with the installations of the fuel oil service heater, the cargo stripping system, and the satellite communications system should be remitted because they are each a part of a modification. Customs ruled at the application stage that duty with respect to these items may be remitted if it could be established that these operations were permanently attached to the vessel and essential to the vessel's successful operation. See Otte v. United States, 7 C.C.P.A. 166 (1916).

To determine whether a particular operation is a modification as opposed to a repair, the appropriate inquiry is to analyze the
condition of the structures prior to being replaced. Customs has determined that even though an operation might, under normal circumstances, be considered a permanent duty-free modification, the benefit of such a finding is not extended to operations which encompass the replacement of existing structures which are in need of repair at that time. If a permanent addition is a first-time installation, or if it replaces an existing structure which is in good working order at the time of its replacement and an enhancement in operating efficiency is provided, the operation may be considered a bona fide duty-free modification. Headquarters Ruling 111224 (Feb. 19, 1991).

The Customs Service is satisfied that the fuel oil service heater and the satellite communications system installations are a part of a modification. The evidence submitted establishes that these items are permanent first-time installations and not replacements for an existing structure in need of repair. Accordingly, duty with respect to these items is remitted. The Customs Service is, also, satisfied that the petitioner has demonstrated that duty on the cargo stripping system installation should be remitted. The evidence submitted (statement of port engineer, dated Mar. 14, 1989) establishes that the cargo stripping system modification was implemented to enhance the vessel's efficiency and was not a replacement of an item in need of repair.

HOLDING:

After a thorough review of the submitted evidence, this petition for relief is granted, in part, and denied, in part, for the reasons detailed 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

Previous Ruling Next Ruling