HQ 0112795 - Vessel Repair Entry No. 906-3605053-7, S/S ASPEN, Modifications; drydocking; surveys; 19 U.S.C. 1466; 19 CFR 4.14 - United States International Trade Commision Rulings

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HQ 112795

January 5, 1994

VES-13-18 CO:R:IT:C 112795 BEW

CATEGORY: CARRIER

Deputy Regional Director
Commercial Operations
U.S. Customs Service
Pacific Region
One World Trade Center
Long Beach, California 90831--700

RE: Vessel Repair Entry No. 906-3605053-7, S/S ASPEN, Modifications; drydocking; surveys; 19 U.S.C. 1466; 19 CFR 4.14

Dear Sir:

This is in reference to your memorandum of June 28, 1993, which transmitted an application for relief from duties filed by Aspen Tanker, Inc., in relation to the above referenced vessel repair entry dated March 26, 1993. The entry and the application were timely filed. The vessel arrived at the port of Portland, Oregon, on March 20, 1993.

FACTS:

The S/S ASPEN is a United States-flag vessel owned by Aspen Tanker, Inc. The subject vessel arrived in the United States after having extensive foreign vessel repair work performed at the Mitsubishi Heavy Industries, Ltd., shipyard in Nagasaki, Japan, during the period of October 12, 1992 through March 5, 1993. Customs and the vessel operator are in substantial agreement on the issue of dutiability, and only (6) six items are offered for our review.

The entire vessel repair entry involves a potential duty of $224,933.50.

The applicant claims that relief for the subject items should be granted because the items should be classified as nondutiable items covered under title 19, United States Code, section 1466 (10 U.S.C. 1466) and section 4.14 of the Customs Regulations (19 CFR 4.14).

The applicant claims that certain items listed on Mitsubishi Heavy Industries, Ltd. invoice No. 3142-543320-01 are nondutiable costs for modifications and surveys. You have requested our advice concerning the following repairs that relate to modifications/alterations/additions.

Item No. Invoice Description

106((1) Mitsubishi Heavy Industries Snipping Off 3142-543320-01

203 Mitsubishi Heavy Industries Vent Riser (a)(b)& (c) 3142-543320-01 Retrofitting

203 Mitsubishi Heavy Industries Vent Riser (addition) 3142-543320-01 Retrofitting

7 American Bureau of Shipping Drydocking & 6002199182 Boiler survey

8 Nahakita Seisahusho SK-550A valve
9210M-15 Used in shipyard

006(d) Mitsubishi Heavy Industries Cargo line gas- 3142-543320-01 free certificate

ISSUES:

(1) Whether certain work performed in a foreign country constitutes modifications/alterations/additions to the hull and fittings rather than equipment purchases or repairs within the meaning of 19 U.S.C. 1466?

(2) Whether the costs for ABS drydocking and boiler surveys constitute dutiable repair costs.

(3) Whether the cost associated with a gas free certificate constitutes a dutiable repair cost.

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.

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).

In the present case, the applicant claims that the installation of the following:

Item No. 203 (a)(b)& (c)- Mitsubishi Heavy Industries invoice No. 3142-543320-01, Vent Riser Retrofitting

Item No. 203 (additional) - Mitsubishi Heavy Industries invoice No. 3142-543320-01, Vent Riser Retrofitting

Nahakita Seisahusho invoice No. 9210M-15, SK-550A valve (Used in installation of shipyard item No. 203) is a design and operational improvement over the old one. It is claimed that these items were not found to be damaged at the time they were replaced and that the permanent installation of the subject items is to improve the efficiency of the vessel's operation and should be properly considered a non-dutiable modification.

Examination of the entire record, and the documentation submitted with the application, including that portion of the invoice relating to the said items, reveals that these items were installed to enhance the operation of the vessel's efficiency and are permanent installations to the vessel's hull and fittings. Accordingly, the said items are non-dutiable modifications/ additions/alterations to the hull and fittings of the vessel remissible under the statute.

The applicant claims that Item 106((1) Mitsubishi Heavy Industries - Snipping off is a modification to the vessel's hull and fittings. The applicant claims that the snipping operation was performed to prevent future cracking of the left bulkhead. Item 106(2) indicates that cracks were gouged and rewelded. It is apparent that the work in question was due to an ongoing problem. In this regard we note that the third element enumerated on page 3, one of the four listed which are taken into consideration in determining whether a particular procedure has resulted in a modification, states as follows:

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.

Under Customs long-standing and consistently applied administrative policy, an installation, even one of a permanent nature, is considered to be a dutiable repair rather than a modification if the installation addresses a repair need. Thus, if an area of a vessel is enhanced by the replacement of one permanent installation with another, the operation is considered dutiable if the evidence reveals that a defect or wastage was present in the former installation, which condition was cured by replacement. (See ruling l10551 LLB, dated December 12, 1989).

Accordingly, the work for which the applicant seeks relief in item 106(1) which was necessary due to a recurring repair need, constitutes dutiable repairs rather than non-dutiable modifications.

With regard to the ABS Drydocking and boiler 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, the ABS docking survey is non-dutiable, and the boiler survey is dutiable as a part of the boiler repairs.

Item 006(d) - cargo line gas-free certificate listed on MBI invoice No. 3142-543320-01 covers the cost incurred for obtaining a gas free certificate. Pursuant to C.I.E.'s 1188/60 and 429/61 the cost of obtaining a gas free certificate constitutes an ordinary and necessary expense incident to repair operations and is dutiable. This charge should be apportioned between the costs which are to be remitted and those for which relief is not warranted, and duty assessed on that portion of the charge applicable to latter. Accordingly, the cost associated with item 006(d) should be prorated.

HOLDING:

1. The installation of Item Nos. 203 (a), (b), and (c), 203 (additional) and Item 8 constitutes modifications/alterations/ additions to the hull and fittings of the vessel rather than repairs. As such, the cost of this work is not dutiable under 19 U.S.C. 1466.

2. The work for which the applicant seeks relief in item 106(1) which was necessary due to a recurring repair need, constitutes dutiable repairs rather than non-dutiable modifications.

3. The cost for the ABS docking survey is non-dutiable, and the cost for the boiler survey is dutiable as a part of the boiler repairs.
4. The cost of the all charges for obtaining a gas-free certificate, item 006(d), should be apportioned between the costs which are to be remitted and those for which relief is not warranted, and duty assessed on that portion of the charge applicable to latter.

Sincerely,

Arthur P. Schifflin

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