HQ 0112756 - Vessel Repair Entry No. VR-C53-0020954-7, S/S MONTRACHET, Voyage 185, Modifications; drydocking; accessing; gauging; inspection and cleaning; U.S. manufacture and spare parts - United States International Trade Commision Rulings

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HQ 112756

November 1, 1993

VES-13-18 CO:R:IT:C 112756 BEW

CATEGORY: CARRIER

Regional Director, Commercial Operations
U.S. Customs Service
South Central Region
New Orleans, Louisiana 70130

RE: Vessel Repair Entry No. VR-C53-0020954-7, S/S MONTRACHET, Voyage 185, Modifications; drydocking; accessing; gauging; inspection and cleaning; U.S. manufacture and spare parts

Dear Sir:

This is in reference to an application for relief from duties filed by Crest Tankers, Inc., in relation to the above referenced vessel repair entry dated December 21, 1992. The entry and the application were timely filed. The vessel arrived at the port of Corpus Christi, Texas, on December 21, 1992.

FACTS:

The S/S MONTRACHET is an United States-flag vessel owned by Crest Tankers, Inc. The subject vessel arrived in the United States after having extensive foreign vessel repair work performed at a shipyard in Croatia, during the period of November 4 through December 1, 1992. Customs and the vessel operator are in substantial agreement on the issue of dutiability, and only (7) seven items are offered for our review.

The applicant claims that certain items listed on Viktor Lenac Shipyard Invoice 38 are non-dutiable costs for services, staging, transportation, inspections, modifications and spare parts. Our findings as to the following invoices are set-forth below:

ABS Gauging
Kansas Packing Co. Inc. invoice 25332
Mariners-Astubeco & Texas Marine Supply invoices World Wide Metric (3 items) Port Electric & Fax Message Viktor Lenac (VL) item 606a
Viktor Lenac (VL) item 802b, c & d (not c add) Viktor Lenac (VL) item 806 & 807a

ISSUES:

(1) Whether the foreign shipyard work described in Viktor Lenac Invoice 38 in items 806 and 807a constitutes modifications to the hull and fittings of the vessel so as to render the work nondutiable under 19 U.S.C. 1466.

(2) Whether the costs for accessing referred to in item 606a constitute dutiable repair costs.

(3) Whether the costs for gauging referred to in item 802b, c, & d constitute dutiable repair costs.

(4) Whether the costs for an ABS gauging survey constitute dutiable repair costs.

(5) Whether sufficient evidence is presented to establish that certain owner supplied parts or spare parts used in the foreign repair work are owner-supplied spare parts or spare parts which are free under the vessel repair statute (19 U.S.C. 1466(h).

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.

Item 806 of the subject invoice shows that the flat bar was removed and a new gusset bracket and stringer face plate were installed, and in item 807(a) cracked flanges and webs were renewed. These repairs were made to replace damaged parts. Accordingly, items 806 and 807(a) are dutiable repair costs. Where accessing work is integral to dutiable repairs, the accessing work is also dutiable (see HQ 108366 PH). The accessing work performed in item 606(a) was for the performance of dutiable repairs, therefore these costs are dutiable.

In C.I.E. 429/61 we noted that:

... expenses which are incurred in conducting inspections made subsequent to the repairs, so as to ascertain whether the work had been properly performed, are dutiable as integral parts of the expenses of repairs although separatly [sic] itemized. Moreover, testing which is effected for the purpose of ascertaining whether repairs to certain machinery or parts of the vessel are required, or are performed in order to ascertain if the work is adequately completed, are also integral parts of the repairs and are accordingly dutiable.

Pursuant to the holdings in C.I.E. 429/61, ultrasonic thickness gauging for the purpose of ascertaining whether repairs are required is considered an integral part of the repair work performed (See HQ 109144 GEV). In the subject case in Item 802- Tank Inspection, Sub Item (3) ultrasonic gauging, it indicates that all readings were satisfactory and no repairs arose out the gauging. Therefore, the cost associated with item 802(c) is non- dutiable. With regard to item 802 (b), expenses which are incurred in conducting inspections made subsequent to repairs to ascertain whether repairs are necessary are dutiable. Therefore, the cost associated with item 802(b) is dutiable. We note that in item 802(d) repairs were made to the fuel oil settling tanks, therefore the cost in item 802(d) is dutiable.

With regard to the ABS gauging survey, Customs has held that where periodic surveys are undertaken to meet the specific requirements of a classification society, insurance carrier, etc., the cost of the surveys is not dutiable even when dutiable repairs are effected as a result thereof; however, in the liquidation process Customs should go beyond the mere labels of "continuous" or "ongoing" before deciding whether the item is dutiable. If an inspection or survey is conducted as a part of an ongoing maintenance and repair program labelled "continuous" or "ongoing" the cost is dutiable. Also, if the survey is to ascertain the extent of damage sustained, or to ascertain if the work is adequately completed, the costs are dutiable as part of the repairs which are accomplished pursuant to holdings in C.I.E. 429/61, C.S.D. 79-2, and C.S.D. 79-277. Accordingly, we find the ABS gauging survey to be non-dutiable.

With regard to the items of cost relating to those items which are alleged to be a part of the ship's spare parts, we have found that the Customs administration of duty assessment issues under section 1466 regarding U.S.-made materials purchased in the U.S. had for some time been guided by the terms of Treasury Decision 75-257 (T.D. 75-257). That decision provides that when materials of U.S.-manufacture are purchased by the vessel owner in the U.S. for installation abroad by foreign labor, the labor cost alone is subject to duty under section 1466. When those same materials are purchased by the owner overseas or purchased in the U.S. by parties other than the owner, the cost of the materials themselves (even though of U.S.-manufacture) was also subject to vessel repair duty.

The climate with regard to parts shipped abroad from the United States for foreign installation was transformed on August 20, 1990, when the President signed Public Law 101-382 which added a new subsection (h) to section 1466. While this provision 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 an 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 from third parties in the United States, a domestic bill of sale to the vessel operator must be presented. Further, with regard to imported articles, there must be presented a certification from the owner or master that the vessel at issue is a cargo vessel and that the imported articles were purchased for installation aboard the company's vessels.

If the elements stated above are proven to the satisfaction of Customs, the cost of foreign labor utilized for 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. Modifications will of course continue to be treated as duty-free, both materials and labor.

The provisions set forth in 1466(h) expired on December 31, 1992. In the subject case the vessel entered the U.S. prior to the expiration of the subject statutory provisions, therefore, the invoices relating to spare parts will be treated according to the provisions set forth above.

With regard to Kansas Packing Co., Inc. invoice No. 25332, Mariners-Astubeco & Texas Marine Supply invoices, and World Wide Metric (3 items) Port Electric & Fax Message, the documents submitted are insufficient to sustain proof that the articles used in the foreign repairs were spare parts that were previously imported and duty paid or are U.S. manufactured parts.

HOLDING:

(1) The foreign shipyard work described in Viktor Lenac Invoice 38 in items 806 and 807a constitutes dutiable repair costs.

(2) The costs for accessing referred to in item 606a constitute dutiable repair costs.

(3) The cost in item 802(c) for Ultrasonic thickness gauging where no repairs were made constitutes non-dutiable testing and inspection cost. The costs for gauging referred to in item 802b, constitute expenses which were incurred in conducting inspections made subsequent to repairs to ascertain whether repairs were necessary are dutiable. Therefore, the cost associated with item 802(b) is dutiable. In item 802(d) repairs were made to the fuel oil settling tanks, therefore the cost in item 802(d) is dutiable.

(4) The work performed in the ABS gauging survey constitutes non-dutiable costs.

(5) The evidence submitted is insufficient to sustain that either duty has been paid on or that certainother owner-supplied parts are of U.S. origin. In absence of such evidence, the cost of the owner supplied parts is dutiable. If, prior to liquidation, the proper certification and/or proof of prior importation is presented, the said items considered under section 1466(h) would be considered free of duty.

Sincerely,

Arthur P. Schifflin

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