HQ 0112550 - Vessel Repair; Baltimore, Maryland, Vessel Repair Entry No. 788-4005878-4, dated May 29, 1992; C.S. GLOBAL LINK; Voyage 10; Application; Modification; Warranty; 19 U.S.C. 1466 - United States International Trade Commision Rulings

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HQ 112550

June 15, 1993

VES-13-18-CO:R:IT:C 112550 BEW

CATEGORY: CARRIER

Chief, Residual Liquidation Protest Branch New York Region
6 World Trade Center
New York, New York 10048-002980

RE: Vessel Repair; Baltimore, Maryland, Vessel Repair Entry No. 788-4005878-4, dated May 29, 1992; C.S. GLOBAL LINK; Voyage 10; Application; Modification; Warranty; 19 U.S.C. 1466

Dear Sir:

This is in response to your memorandum dated December 11, 1992, that transmitted an application for relief from duties filed by Transoceanic Cable Ship Co., in relation to the above referenced vessel repair entry.

FACTS:

The C.S. GLOBAL LINK is a U.S.-flag vessel owned by Transoceanic Cable Ship Co. The record shows that the shipyard work in question was performed on the subject vessel in Falmouth, United Kingdom, during the period of May 7 through May 12, 1992.

The record reflects that the subject vessel, the C.S. GLOBAL LINK, arrived at the port of Baltimore, Maryland, on May 22, 1992. Vessel repair entry No. 788-4005878-4 was filed on May 29, 1992. The entry indicates that the vessel, among other items, had a strut design modification installed while in Falmouth, United Kingdom. An application for relief was filed on May 28, 1992.

The applicant alleges that the vessel was delivered to Transoceanic Cable Ship Co., by the builder Far East Levington Shipbuilding Co., Singapore, on May 30, 1991, with a one-year warranty for any defects. A copy of the cable ship's construction agreement which sets forth the warranty clause has been submitted with the application.
The applicant alleges that in January 1992 while the vessel was in drydock at Bethlehem Steel, Sparrows Point, Maryland, fractures were found at the port and starboard struts of the "A" frame bracket. Repairs were carried out by Bethlehem at that time as a "warranty item." It claims that subsequently a similar fracture in the starboard strut of a sistership, the C.S. GLOBAL SENTINEL was found while the vessel was in Honolulu. It claims that at this time it was determined that the strut design required an extensive modification and that the work was to be accomplished by the builder at no expense to the owner. The applicant claims that since the vessel was to be in Southhampton, England, after completing a cable installation, the builder elected to have Appledore Shipyard, Falmouth, England, perform the work.

The applicant claims that Appledore invoice No. 631, represents a "warranty modification" at no cost to the owner. It also claims that at the same time, a number of improvements that developed as a result of nearly a year of operation, were considered to be desirable and were done at the shipyard during this time. It requests remission of duty on certain items listed below alleged to be modifications:

Item # Description

18 Hatch Cover (cable highway)

20 Steering Gear Hydraulic pipes

21 S.W. Services Line in E.R.

22 Lifting Eye

26 P & S Funnels

27 P & S Funnels

28 Bridge Wing Gratings

29 M.E.Lube Oil Pipes

30 L.T.O. Compartment

31 "A" Frame Guard

34 Wood doors

35 Sewage Treatment Plant

26 P & S funnels

40 L.C. Room ventilating system

ISSUES:

1. Whether the court established elements for warranty recognition are present in this case, as detailed in the case of Sea-Land Service, Inc. v. United States, 683 F. Supp. 1404 (1988).

2. Whether the foreign shipyard work described herein would constitute modifications to the hull and fittings of the vessel 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 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.

In its application of the vessel repair statute, the Customs Service has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. Over the course of years, the identification of work constituting modifications on the one hand and repairs on the other has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a modification that 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, 18 C.C.P.A. 137 (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 constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function.

4. Whether an item under consideration provides an improvement or enhancement in operation or efficiency of the vessel.

For purposes of section 1466, 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.

T.D. 34150, 26 Treas. Dec. 183, 184 (1914)(quoted with approval in Admiral Oriental).

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.

In the case of Sea-Land Service, Inc. v. United States, 683 F. Supp. 1404 (1988), the Court addressed whether repair work performed on a newly constructed vessel subsequent to its delivery to the owner might be considered to be part of the new construction contract. Simply put, the Court considered whether "completion of construction" is a viable concept so as to render the duty provisions of 19 U.S.C. 1466(a) inapplicable if proven. The Court found completion of new construction to be a valid concept, subject to specific conditions, which are:

1. "All work done and equipment added [must be] pursuant to the original specifications of the contract for the construction of the vessel ...."

2. "This basic standard is limited to work and equipment provided within a reasonable period of time after delivery of the vessel."

The contract for construction of the subject vessel contained clauses guaranteeing for twelve (12) months any area of the vessel for which the builder accepted responsibility under the contract and specifications, conditioned upon written notification from the owner of any covered defect within the agreed upon 12-month period.

In reviewing the warranty case on remand from the Court, Customs had the opportunity to review the contract, the specifications, and a so-called "guarantee notebook." This document consisted of numerous guarantee items, some generic in nature and some specific, and represented the written notification of defects from the owner to the builder as required by the contract. Each noted defect was recorded on a separate sheet and assigned a "G" guarantee number. Each was dated, signed by an owner's representative and a builder's representative, and contained a short narrative of the specific complaint.

In that case, we found that the court-ordered criteria had been satisfied and that the "reasonable period of time" for the warranty period was the one-year period specified in the contract. We have since held likewise in similar cases, and have adopted the one-year limit as the benchmark for honoring new construction warranties which otherwise qualify.

The question now to be addressed is whether the Sea-Land Service, Inc., supra., court-ordered criteria and/or contract requirements have been satisfied in this case.

In the case under consideration, the application has submitted the new construction contract. The contract for construction of the subject vessel contains a guarantee clause which provides that:

1. In the event that any defects on the original materials or workmanship in the VESSEL, other than those defects which are due to wear and tear or misuse and other than defects in items furnished by the OWNER, occur within one year after delivery of the vessel to the OWNER, such defective parts shall be replaced or the defects remedied by the BUILDER at the BUILDER's costs....

We note that the repair bill submitted in this case indicates repairs having been effected before the expiration of the one year period specified in the warranty clause of the contract. The fact that repairs were made during the stated period permits us to assume that notification was given to the original builder by the vessel operator as specified in the contract, so long as we find an invoice from the original builder stating that work was performed at no charge. If repair work is performed by remote contractors as permitted under the contract, there must be evidence that the builder was notified before repair or that the vessel operator was reimbursed by the original builder. The record in this case shows that Appledore charged applicant has submitted a copy of an invoice No. 631 for the amount of ?244,841.00, dated May 12, 1992, from Far East Levingston Shipbuilding Limited for the "A" bracket modification. Based on our review of this document, it appears that this is a copy of Appledore's Invoice No. 631 with Far East Levingston's address either typed or copied on it. Since the record does not contain evidence which satisfies the criteria established in the case of Sea-Land Service, Inc., supra., invoice No. 631 must be denied as to the warranty claim. With regard to the work performed by Watercraft International Limited, we find the work which was performed to make various changes and adjustments to the lifeboat davits to be warranty work.

With respect to the Appledore invoice No. 631/228 we find that the work associated with this invoice relating to the "A" Bracket modification provides an improvement or enhancement in operation or efficiency of the vessel. This work is in the nature of a modification rather than a repair. Accordingly, we find that the work associated with the "A" bracket modification to be remissible under the statute as a nondutiable modification.

With regard to Appledore's invoice No. 631/228, we find that the following items are permanent installations to the hull and fittings of the vessel, and are nondutiable modifications remissible under the statute.

18 Hatch Cover (cable highway)

20 Steering Gear Hydraulic pipes

21 S.W. Services Line in E.R.

22 Lifting Eye

26 P & S Funnels

27 P & S Funnels

28 Bridge Wing Gratings

29 M.E.Lube Oil Pipes

30 L.T.O. Compartment

31 "A" Frame Guard

34 Wood doors

35 Sewage Treatment Plant

26 P & S funnels

40 L.C. Room ventilating system

HOLDING:

Following a thorough review of the facts and evidence, and after an analysis of the law and applicable precedent decisions, we have determined to partially allow and partially deny the Application for Relief, as specified in the law and analysis portion of this decision.

Sincerely,

Acting Chief

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