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HQ 112258

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March 14, 1995

VES-13-18-CO:R:IT:C 112258 BEW

CATEGORY: CARRIER

Chief, Residual Liquidation and Protest Branch Commercial Operations
6 World Trade Center
New York, New York 10048-002980

RE: Protest; Vessel Repair Entry No. 1001-91-200571; M/V NEDLLOYD HOLLAND; V-1; Modifications; Post Repair Cleaning and Removal of Debris 19 U.S.C. § 1466

Dear Sir:

This is in response to your memorandum dated June 10, 1992, forwarding for our consideration a protest submitted by the attorney for Sea-Land Services, Inc. concerning the above-captioned vessel repair entry. 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 M/V NEDLLOYD HOLLAND is an United States -flag vessel owned by Sea-Land Services, Inc. (Sea-Land). The vessel had foreign shipyard work performed in March and April 1988. Subsequent to the completion of the work the vessel arrived in the port of Boston, Massachusetts, on April 26, 1988. A vessel repair entry covering the work is question was untimely filed on June 7, 1988. An application for relief, dated August 15, 1988, was untimely filed transmitting only a portion of the requisite cost documentation. An additional letter dated September 5, 1988, was filed transmitting additional documentation. Further, additional documentation was submitted on January 12, 1990, in response to a Notice of Action dated December 18, 1989, from the New York Vessel Repair Liquidation Unit. A decision on the application was rendered on July 18, 1990. The entry was liquidated on October 12, 1990 for duty in the amount of $688,241.50. A protest was timely filed on January 7, 1991. On September 6, 1991, a supplement to the protest was filed by the law office of Ross and Hardies, Sea-Land's attorney. The following items have been protested.

1. Jurong Shipyard Invoice No. 14616
2. Jurong Shipyard Invoice No. 14645
3. Sulzer Invoice No. 14421
4. International Marine Engineering Order No. HL 8237 5. American Bureau of Shipping Invoice No. 642921 6. Duplicate billing relating to certain invoices

ISSUE:

Whether the foreign shipyard costs for which the protestant 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 the 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.

The protestant claims that items 1, 2, and 3 are modifications to the vessel's hull and fittings. In regard to the alleged modifications in question, the record shows that the vessel in question is one of Sea-Land's econoships, and that the work performed in item 1 was modifications made to the vessel hatch covers so as to enable the vessel to carry 20 and 35 foot containers. Accordingly, we find the cost associated with item 1 to be nondutiable. The protest is granted as to item 1.

The record also shows that the work performed in item 2 was modifications to the cylinders. The items of repair associated with the subject invoice were for modifications to the cylinders. Accordingly, we find the cost associated with item 2 to be nondutiable. The protest is granted as to item 2.

Sea-Land claims the item 3, Sulzer invoice No. 14421 is for supervision of the modifications made to the vessel and is nondutiable. Sulzer invoice No. 14421 relates to items of cost for the vessel S\L COMMITMENT (see Sea-Land's letter of January 21, 1990.) The items of cost on this invoice should not be included in this entry.

With regard to item 4, Sea-Land Job Order HL 8237 and International Marine Engineering Order No. HL 8237, the invoices attached to this job order indicate that the repair work was performed on the vessel ELIZABETH L ex M/V AMERICAN NEW JERSEY. Our review of the record reveals that this document does not contain work performed on the NEDLLOYD HOLLAND but relates to another vessel, possibly the RALEIGH BAY. The items of cost on this invoice should not be included in this entry.

The protestant claims that the surveys listed in item 5, are either required by the ship's classification society (ABS) in order to retain its classification or constitute special surveys related to the modifications made to the vessel's cargo fittings and main engine.

With regard to the invoice relating to the American Bureau of Shipping (ABS) surveys under consideration, we note C.S.D. 79-277 which states:,

"[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 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, the C.S.D. 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 the 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 under the C.S.D. 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 American Bureau of Shipping). In the liquidation 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 from duty repair work done by a shipyard in preparation of a required survey. 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.

Upon review of the survey documents (ABS invoice No. 642921), we find the survey to be of the type required by classification societies to maintain a vessel in its class and service. Further, we note that, unlike the circumstances cited in C.S.D. 79-277, there is no repair element shown in four (4) of the twelve items under consideration (drydocking survey, annual survey - hull/machinery and annual loadline inspection, annual survey - automation, and modification survey ). With regard to the remaining items (reactivation survey, , tailshaft survey, completion of immediate survey, special continuous survey - hull No. 1, special continuous survey - machinery & electrical equipment, special periodical survey of automation, auxiliary and waste heat boiler survey, and m.e. repairs survey, we find that the need for repair is suggested and that these items are therefore dutiable. The protest is granted in part and denied in part as to item 5.

With regard to item 6, misapplication of exchange rate and double billing, it appears that certain invoices have been incorrectly billed in Singapore dollars or pounds rather than U.S. dollars. We agree with your recommendation as to the following invoices:

Jurong Shipyard Invoice 14616
McCorkills
Alfa Laval
Walter Radut Associates invoice No. 617
Yokosin Marine invoice No. YM4491
Hamworth
Nippon Diesel invoice No. 10701
Sulzer #BNO. 3-736.5787
Sulzer #BNO. 3-736.5380
Sulzer
Mackey
W.B. Arnold

Please reliquidate these invoices using U.S. dollar figures.

Pursuant to the "but for" test enunciated by the U.S. Court of Appeals for the Federal Circuit in Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc. v. United States, Slip Op. 93-1354, decided December 29, 1994 (affirming the decision of the U.S. Court of International Trade at 815 F.Supp. 1484 (1993)), post-repair cleaning and protective coverings for repair work are dutiable under 19 U.S.C. § 1466.

HOLDING:

Following a thorough review of the evidence submitted as well as an analysis of the applicable law and precedent, we have determined to allow the protest in part and to deny it in part, as specified 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.

We note that a penalty for untimely filing has been assessed in this case. Upon reliquidation of this entry, please notify the Fines, Penalties and Forfeiture Office, Boston Massachusetts, of the results of your reliquidation

Sincerely,

Arthur P. Schifflin
Chief

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