HQ 0112870 - Vessel Repair Entry No. 110-0104423-6; SEA-LAND VOYAGER V-189/192; Modifications; Inspection - United States International Trade Commision Rulings

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HQ 112870

September 27, 1993

VES-13-18-CO:R:IT:C 112870 GEV

CATEGORY: CARRIER

Deputy Regional Director
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, California 90831

RE: Vessel Repair Entry No. 110-0104423-6; SEA-LAND VOYAGER V-189/192; Modifications; Inspection

Dear Sir:

This is in response to your memorandum dated August 5, 1993, forwarding an application for relief from duties assessed pursuant to 19 U.S.C. 1466. You have requested our advice regarding seven items contained within the above-cited vessel repair entry. Our opinion on these items is set forth below.

FACTS:

The SEA-LAND VOYAGER is a U.S.-flag vessel operated by Sea- Land Service, Inc. The subject vessel had foreign shipyard work performed during February and March of 1993. Subsequent to the completion of the work the vessel arrived in Tacoma, Washington on March 28, 1993. A vessel repair entry was filed on the date of arrival.

Pursuant to an authorized extension of time, an application for relief was timely filed on June 23, 1993. The applicant claims that various work constitutes modifications or is otherwise considered non-dutiable. In support of these claims the applicant has submitted shipyard invoices and drawings depicting the work in question.

ISSUE:

Whether the costs of the foreign shipyard operations for which the applicant seeks relief are dutiable pursuant to 19 U.S.C. 1466.

LAW AND ANALYSIS:

Title 19, United States Code, 1466, 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 foreign or coastwise trade, or vessels intended to engage in such trade.

In its application of the vessel repair statute, Customs has held that modifications 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 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. 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 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.

In regard to the particular items forwarded for our review, we find that the record supports the applicant's claim that the work detailed under the following items constitutes non-dutiable modifications:

Item 11 - Hinge Frame
Item H10 - Faceplate
Item H11 - Faceplate
Item H-7 - Foremast Foam Monitor
Item M-3 - Stern Tube Piping
Item 26 - Communication System

Item 2.1-4 on Mitsubishi Heavy Industries, Ltd. (MHI) bill no. 3142-547100-02 covers an anchor chains inspection. In regard to the dutiability of inspection/survey costs, we note that C.S.D. 79-277 stated 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 American Bureau of Shipping (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 a 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 (emphasis added).

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 - 5 -
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.

In regard to Item 2.1-4, we note that although the MHI invoice states that the work was a "Required Inspection for USCG and ABS", the record contains no corroborating documentation from either the USCG or the ABS. Absent evidence to that effect, we hold the anchor chains inspection covered by Item 2.1-4 to be dutiable.

HOLDING:

Upon reviewing the record in its entirety, we have determined to allow in part and deny in part the application for relief in this matter as specified in the Law and Analysis portion of this ruling.

Sincerely,

Arthur P. Schifflin

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