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HQ 111994

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March 14, 1995

VES-13-18-CO:R:IT:C 111994 BEW

CATEGORY: CARRIER

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

RE: Vessel Repair Entry No. C30-0060641-9; S\S ARCO SPIRIT; v-CF 77; 19 U.S.C. § 1466; Application; Modifications; Protective Coverings

Dear Sir:

This is in response to your memorandum dated November 14, 1991, which forwarded an application for relief from duties filed on behalf Arco Marine, Inc., in relation to the above referenced vessel repair entry dated June 6, 1991. You request our review of the following three (3) items contained within the above-referenced entry:

1. Item No. 324 Filter Installation
2. Item No, 412 Deck Seal
3. Stern Towing

Our review of this matter has been delayed pending the outcome of on-going litigation which has now been resolved. Our findings on this matter are set forth below.

FACTS:

The record reflects that the S/S ARCO SPIRIT arrived in the port of Port Angeles, Washington, on June 25, 1991, filed a timely vessel repair entry, and supplemented that entry as required by the Customs Regulations. While in Korea the vessel underwent extensive foreign shipyard work. The applicant claims that the above stated items are modifications\additions\alterations to the hull and fittings of the vessel. ISSUE:

Whether the foreign shipyard costs for which the applicant seeks relief are dutiable under 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.

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

1. Item No. 324 Filter Installation
2. Item No, 412 Deck Seal
3. Stern Towing
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.

In regard to Hyundai Invoice No. 911731 , item o. protective coverings, we note that the charges incurred are for protective coverings to prevent dust and debris from damaging certain equipment and to protect the passageways. Pursuant to the "but for" test enunciated by the U.S. Court of Appeals in Texaco Marine Services, Inc. and Refining and Marketing, Inc., v. United States, (Slip Op. 93-1354, decided December 29, 1994), protective coverings necessitated by dutiable repairs are dutiable. Accordingly, in view of the aforementioned court decision item o. protective coverings, is dutiable.

HOLDING:

The installation of Item Nos. 324, 412, and 901 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.

Sincerely,

Arthur P. Schifflin
Chief

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