HQ 0112638 - Vessel Repair; Warranty; Modification; Staging; Transportation; 19 U.S.C. 1466; M/V PRESIDENT ADAMS, V-25; Protest No. 2704-93-100626. - 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 > 1994 HQ Rulings > HQ 0112593 - HQ 0112781 > HQ 0112638

HQ 112638

September 7, 1994

VES-13-18 CO:R:IT:C 112638 BEW

CATEGORY: CARRIER

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

RE: Vessel Repair; Warranty; Modification; Staging; Transportation; 19 U.S.C. 1466; M/V PRESIDENT ADAMS, V-25; Protest No. 2704-93-100626.

Dear Sir:

This letter is in response to memoranda from your office which forwarded for our review the above-referenced protest on the liquidation of the vessel repair entry filed for the M/V PRESIDENT ADAMS, Voyage 25.

FACTS:

The vessel PRESIDENT ADAMS arrived at the port of San Pedro, California, on March 23, 1991, and filed a timely vessel repair entry. The entry indicates the vessel had foreign shipyard work while in Japan, Taiwan, and Hong Kong. The entry also indicates that during the course of its foreign voyage, the vessel called in Singapore where it underwent extensive repair and modification procedures. An application for relief was filed, and this application was allowed in part and denied in part (Headquarters Ruling Letter 111793 LLB, dated December 24, 1991). A petition for review was subsequently filed that was likewise allowed in part and denied in part (Headquarters Ruling Letter 112214 GEV, dated September 16, 1992). The vessel operator now files a protest in which it seeks relief for items it identifies as non- dutiable as warranty or modification work. It also provides clarification on the method by which it segregated staging and transportation costs.

ISSUES:

(1) Whether work claimed to have been performed pursuant to warranty is subject to duty in this case.

(2) Whether certain work performed to the vessel in Jurong Shipyard resulted in modifications to the vessel and is therefore not subject to duty under 19 U.S.C. 1466.

(3) Whether items identified as staging and transportation are properly segregated and exempt from duty under 19 U.S.C. 1466.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466(a), 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 the foreign or coastwise trade, or vessels intended to be employed in such trade.

In the case of Sea-Land Service, Inc. v. United States, 683 F. Supp. 1404 (CIT 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. 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 vessel under consideration in that case contained clauses guaranteeing for twelve 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 twelve-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. 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 bench mark for honoring new construction warranties which otherwise qualify.

In the present case, the protestant seeks relief for claimed warranty work performed on the bow (Jurong Invoice Item 3.3-2), the hatch covers (Jurong Invoice Item 3.3-10), and the #1 and #2 hatch longitudinal coaming terminations (Jurong Invoice Item 3.3- 14). These operations were performed between February 20, 1991, and March 7, 1991. In a letter dated December 21, 1990, American President Lines stated to Customs that the PRESIDENT ADAMS was delivered on September 30, 1988. The guarantee clause Article 18 of the construction contract reads as follows:

(a) Subject to the provisions of this ARTICLE 18, Contractor guarantees each Vessel for a period of (1) year from the date of delivery of such Vessel under Article 17 (the "Guarantee Period") . . .

(c) Notwithstanding any inspection or failure to reject by the Purchaser or any Regulatory Body pursuant to this Contract, if at any time within the Guarantee Period with respect to any vessel there shall appear, exist or be discovered any Deficiency, and Purchaser gives Contractor notice specifying such Deficiency within 30 days after the end of the Guarantee Period with respect to such Vessel orif the Vessel is at sea at the end of such period not to exceed 10 days after expiration of the normal guaranty period (except as otherwise provided in this contract), such Deficiency shall, upon written demand by Purchaser, be corrected at the sole cost and expense of Contractor . . .

The warranty provisions are conditioned upon timely written notice being given by the owner to the shipyard within 30 days following the expiration of the warranty period, or if the vessel is at sea in a period not to exceed 10 days after expiration of the normal guarantee period, except as otherwise provided in the contract.

The record contains two letters dated October 28, 1991, addressed to Howaldtswerke-Dautsche Werft and Bremer Vulkan AG referencing the Bremer Vulkan Hull Nos. 43 and 44 (Hatch Covers and Coamings). The correspondence states that notice of the deficiency relating to the APL C10 Class Containerships' hatch cover and coaming problems was given on or about February 10, 1989 (APL letter S/N 1362 JCL\HCW). In one of the October 28, 1991, letters it is states that in the summer of 1989, the hatch cover subcontractor, MACOR, completed the work on the PRESIDENT ADAMS on September 27, 1989. An Article 18 "Guarantee Settlement" was executed between APL and Bremer Vulkan A.G. on May 9, 1990. Based on these documents, we find that notice of the deficiency was given timely; that the repair work was performed to correct the deficiency; and that a settlement was entered into in 1990.

The record reveals that on November 22, 1989, Bremer Vulkan AG was notified that the subject vessel was experiencing shell and internal structure damage, and that the damage repairs made in September 1989 had not resolved the problems. The repairs in items 3.3-2, 3.3-10 and 3.3-14 were performed in 1991. These repairs were made beyond the warranty contract and settlement dates. The protestant submitted a letter which indicates that Bremer Vulkan AG has acknowledged that certain items were warranty claims that have been settled. In support of this contention, APL submitted an invoice which indicates that $300,000 has been paid to APL in final settlement of the warranty claims. The documentation shows that a refund of $150,000 relating to the PRESIDENT ADAMS repairs has been made. In a letter dated August 3, 1994, the protestant submitted a breakdown of the $150,000 refund as follows:

Item No. 3.3-2 - Bow Damage - $2,505, refund amount $2,505

Item No. 3.3-10 - Hatch Covers - $78,891, refund amount $78,891

Item No. 3.3-14 - #1 and #2 hatch longitudinal coaming termination - $98, refund amount $98

Item No. 3.3-9 - Ballast Tank Coatings - repair cost $100,373, refund amount $68,506

The protestant alleges that item 3.3-9 - Ballast Tank Coatings was "time barred" under the warranty, however, Bremer Vulkan recognizes some obligation and refunded, in addition to the above amounts for items 3.3-2, 3.3-10, and 3.3-14, an additional amount of $68,506. This amount is applied toward item 3.3-9 Ballast Tank Coatings. Item 3.3-9 was found dutiable in ruling No. 112214 GEV, dated September 16, 1992.

Under 19 U.S.C. 1466, equipments, or any part thereof, including boats, purchased for, or the repairs parts or materials to be used, or the expenses of repairs made in a foreign country are subject to duty. When foreign vessel repairs are made, and a refund of the cost is made to the vessel owner, these repair costs are not subject to duty. Accordingly, we find that the amount of $150,000, the refund associated with the PRESIDENT ADAMS, is non-dutiable under the statute. Please liquidate the cost associated with items 3.3-2, 3.3-10, 3-3-14 and 3.3-9 as outlined above.

II. MODIFICATION CLAIMS

The protestant also seeks relief from duty for other items as modifications to the vessel.

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 modification processes 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 often be welded or otherwise "permanently attached" to the ship because ships are subject to constant pitching and rolling. In addition, some items, the cost of which is clearly dutiable, operate with other vessel components, resulting in the need, possibly for that purposes alone, for a fixed and stable attachment to those vessel parts. It follows that a "permanent attachment" may take 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.

After reviewing the evidence regarding the specific item submitted for our consideration, we find the following:

Jurong Shipyard Item 3.3-19: Removal of Bow Thruster Bars:

This item involved the removal of the strainer bars on the port and starboard side shell. No repairs were made. The item represents an alteration in the design of the vessel that may be characterized as an improvement. The cost of this item is not subject to duty.

III. STAGING AND TRANSPORTATION

Finally, the protestant seeks relief for staging and transportation costs that were held dutiable in our ruling on the application for relief. In this earlier ruling, we stated that, from the invoice, we could not determine whether the staging or transportation costs included with particular items were included in the total cost for that item or were a separate charge. Headquarters Ruling Letter 111793, dated December 24, 1991. By letter dated January 14, 1993, Jurong Shipyard clarifies the invoice by stating that these costs are separate charges. Therefore, the costs for staging or transportation for the following items are not subject to duty:

Jurong Shipyard Item 3.3-11: Cargo Hold D & H Vent Modifications.

Jurong Shipyard Item 3.4-11: No. 4 Stdb F.O. Cracks and Other Steel Work.

Jurong Shipyard Item 5.4-11: Fire Pump Sea Valves

Jurong Shipyard Item 3.1-6: Capac/Chloropac System

HOLDING:

Following a thorough review of the evidence submitted as well as analysis of the applicable law and precedents, we have determined that the Protest should be allowed as set forth in the Law and Analysis portion of this ruling.

In accordance with 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to the protestant no later than 60 days from the date of this letter. Any new billing (the equivalent of the reliquidation of an entry) in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public Access channels.

Sincerely,

Stuart P. Seidel

Previous Ruling Next Ruling