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HQ 112641

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March 21, 1996

VES-13-18-RR:IT:EC 112641 GOB

CATEGORY: CARRIER

Port Director of Customs
Attn.: Vessel Repair Liquidation Unit, Room 415 P.O. Box 2450
San Francisco, CA 94126

RE: Vessel Repair Entry No. C31-0005025-2; 19 U.S.C. 1466; ARCO INDEPENDENCE, V-CF97; Application; Modification; Overhead

Dear Sir:

This is in response to your memorandum dated March 16, 1993, which forwarded the application for relief submitted by ARCO Marine, Inc. ("applicant") with respect to the above-referenced vessel repair entry.

FACTS:

The S.S. ARCO INDEPENDENCE ("the vessel") is a U.S.-flag vessel owned and operated by the applicant. Certain foreign shipyard work was performed on the vessel in Korea in late 1992. The vessel arrived at the port of Valdez, Alaska on November 14, 1992. The subject entry was timely filed on November 15, 1992.

You ask for our determination with respect to the following items:

Item No. Description

321 condensate piping
322 air heater valves
323 F.O. filter
326 oily water separator
407 mooring winch
419 I.G.S. storage rack
420 fairleads
423 manifold valves
427 liferaft platform
429 catwalk extensions
430 removal of unused steel
438 I.G.S. piping
439 I.G.S. piping for cooler
440 foam station catwalk
705 new handrail
819 C.O.W. machine
820 ballast test line
832 cargo pumps
904 pump room
905 gyro compass
906 metritage tank gauging
906-1 metritage tank gauging
906-2 metritage tank gauging
907 spare scrubber tower
910 fuel oil emulsification
913 e/e bilge separator
914 fathometer
915 refund for cables
1,2,3,4 overhead charge

ISSUE:

Whether the costs at issue are dutiable pursuant to 19 U.S.C. 1466.

LAW AND ANALYSIS:

19 U.S.C. 1466 provides for the payment of duty at a rate 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 be employed 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. The identification of work constituting modifications vis-a-vis work constituting repairs has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a nondutiable modification, the following factors have been considered:

1. Whether there is a permanent incorporation into the hull or superstructure of a vessel, either in a structural sense or as demonstrated by means of attachment so as to be indicative of a permanent incorporation. See United States v. Admiral Oriental

Line, 18 C.C.P.A. 137 (1930). However, we note that a permanent incorporation or attachment does not necessarily involve a modification; it may involve a dutiable repair.

2. Whether in all likelihood an item would remain aboard a vessel during an extended lay-up.

3. Whether an item 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 provides an improvement or enhancement in operation or efficiency of the vessel.

Our analysis in this matter is based primarily on the pertinent invoices. The assertions of the application are not considered to be documentary evidence. In this regard, we note the statement of the court in Bar Bea Truck Leasing Co., Inc. v. United States, 5 CIT 124, 126 (1983):

Again, plaintiff has presented no affidavit or other evidence in support of its counsel's bald assertion...

There is no evidence submitted to establish that the individual submitting the application has specific knowledge with respect to the work performed such that the statements of the application would constitute acceptable documentary evidence.

If we are unable to determine the precise nature of certain work because of the lack of clear and probative documentary evidence, and are thus unable to determine that it is nondutiable, such work will be found dutiable. In this regard, we note the statement of the Customs Court in Admiral Oriental Line v. United States, T.D. 43585 (1929):

The evidence is conflicting upon that point, and the plaintiff has not proved the collector's classification to be wrong. The burden is upon the plaintiff to show not only that the collector was wrong in his classification but that the plaintiff was right.

In A Manual of Customs Law by Ruth F. Sturm, 1974 edition, p. 173-174, the author states, in pertinent part:

Where Congress has carved out special privileges or exemptions from the general provisions levying duties upon imported articles, the courts have strictly construed such exceptions and have resolved any doubt in favor of the government. Swan & Finch Company v. United States, 190 U.S. 143, 23 SCR 702, 47 L. Ed. 984 (1903); Pelz-Greenstein Co. v. United States, 17 CCPA 305, T.D. 43718 (1929)... ...
An exception which carves out something which would otherwise be included must be strictly construed. Goat & Sheepskin Import Co., et al. v. United States, 5 Ct. Cust. Appls. 178, T.D. 34254 (1914); [et al.]

After a consideration of the documentation of record we make the following determinations.

Item 321. The invoice reflects the installation of a bypass line from the first stage heater to the condensate filter. Cutting and welding are involved. The invoice does not reflect why this work was performed. There is insufficient evidence to support the allegation of the application that the "installation is considered to assist with the proper application of the vessel." Accordingly, we are unable to conclude that this item is nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 322. The invoice reflects the installation of "isolation valves to the steam supply and return on each boiler air heaters [sic]. Total of 6 air heater elements." There is insufficient evidence to support the allegation of the application that this item is a nondutiable modification. Accordingly, we are unable to conclude that this item is nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 323. The installation of an additional fuel oil filter, is a dutiable repair. The record indicates that the previous filter was not functioning properly. The application states that "[w]ith the type of fuel obtained on the modern market the original strainer was not completely cleaning the fuel oil for proper use."

Item 326. The invoice reflects the cropping out and disposal of original E.R. oily water separator and the installation of a new separator. There is insufficient evidence to support the allegation of the application that "the old system was in operation" and that due "to the new clean water regulations of the USCG and other regulatory bodies the Oil - Water separator in the engine room was upgraded to a larger capacity." Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 407. The application pertains to the clearance checking of the mooring winches ($1,676). The invoice reflects that this item is merely a "check" or test. We find this item to be nondutiable because there is no evidence to show that the expense is an expense of repair or purchase of materials, equipment or repair parts.

Item 419. The invoice reflects the modification of the IGS, including the purging of pipe, the shortening of pipes, and the modifying of IGS pipe. There is insufficient evidence to support the allegation of the application that "[t]he existing system was not large enough to properly handle the IGS system with the type of cargo now being carried. The installation is considered to be necessary for the proper operation of the vessel." Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 420. The invoice reflects "FAIRLEADS INSTALLATION (2)... install by welding Owner's furnished two (2) 18" diameter fairlead on forecastle deck..." There is insufficient evidence to support the allegation of the application that "[w]ith the new installation tie up of the vessel is faster and safer land [sic] is considered to add to the proper operation of the vessel." Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 423. This item is a dutiable repair. The work involves cropping out, renewing, and welding. There is insufficient evidence to support the allegation of the application that "[t]he existing platforms were not large enough for safe operation...The installation was permanent and considered to add to the proper operation of the vessel." Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 427. This item, the enlarging of a liferaft platform, is a nondutiable modification. The invoice indicates that it fits within the description of modification, supra.

Item 429. This item, the extension of a catwalk, is a nondutiable modification. The invoice indicates that it fits within the description of modification, supra.

Item 430. The invoice reflects the removal of unused steel from the maindeck. The work involves cropping out, grinding smooth, and coating. The application states: "Removal of obsolete brackets and steel from deck. There is no repair involved as no replacements were made." The invoice indicates that this item may be a dutiable maintenance item. There is insufficient evidence to support the allegation of the application that this item is nondutiable. Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Items 438 and 439. The invoices reflect the installation of piping and valves for a new cooler. There is insufficient evidence to support the allegation of the application that these items are nondutiable modifications. Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 440. The invoice reflects the installation of support brackets on the starboard side catwalk. This work fits within the description of modification, supra. Therefore, it is nondutiable.

Item 705. The invoice reflects the installation of new handrail. There is insufficient evidence to support the allegation of the application that "[t]he rail is a permanent installation and does not replace any wasted rail. The installation is considered to add to the safe operation of the vessel." Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 819. The invoice reflects work relating to the C.O.W. machines. The invoice does not reflect why this work was performed. There is insufficient evidence to support the allegation of the application that "[t]he new type machine permanently installed allows for programmable operation. The old type was mechanically fixed and not adjustable." Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 820. The invoice reflects the installation of a ballast pollution monitor test line. The invoice does not reflect why this work was performed. We are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 832. The invoice reflects the installation of a pipe line to the cargo pump strainers. The invoice does not reflect why this work was performed, nor is there any conclusive indication that this work is nondutiable. The application states that this item is a "[n]ew permanent installation of a by pass with a [sic] isolation valve to make work possible with less shut down of systems." There is insufficient evidence to support the allegation of the application that this item is nondutiable. Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 904. The invoice reflects the installation of a pump room atmospheric monitor. The invoice does not state why this new system was necessary. There is insufficient evidence to support the allegation of the application that this item is nondutiable. Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 905. The invoice reflects the installation of two gyro compasses. The invoice does not state why these two gyro compasses were necessary. There is insufficient evidence to support the allegation of the application that this item is nondutiable. Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Items 906, 906-1, and 906-2 involve the installation of a metritage tank system. The invoice does not state why this new system was necessary. There is insufficient evidence to support the allegation of the application that "[t]his modification is the permanent installation of an upgraded system. The old system was mechanical in operation and the new system is all electrical with faster and more accurate in operation [sic]. The new system adds to the successful operation of the vessel." Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 907. The invoice reflects the fabrication of a new section of the spare scrubber tower. This work fits within the description of modification, supra. Therefore, it is nondutiable.

Item 910. The invoice reflects the installation of a fuel oil emulsification system. The invoice does not state why this system was necessary. There is insufficient evidence to support the allegation of the application that "[t]his is a new system and does not replace any equipment. The system adds to the efficient operation of the vessel." Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 913. The invoice reflects the installation of an engine room bilge water separator. The invoice does not indicate why a new system was necessary. There is insufficient evidence to support the allegation of the application that "[t]he old separator was not large enough to handle the bilge water to the degree required by the regulations of today." Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 914. The invoice reflects the installation of a new fathometer. The invoice does not indicate why a new fathometer was necessary. There is insufficient evidence to support the allegation of the application that a "more advanced type fathometer was installed permanently for the successful operation of the vessel." Accordingly, we are unable to conclude that this item is a nondutiable. Therefore, we find that it is dutiable. See the excerpt supra from the Customs Court decision in Admiral Oriental Line.

Item 915 reflects a refund for the supply by the vessel owner of cable and splicing kits with respect to the renewal and repair of deck cables. This item is dutiable. Documentation has not been provided to establish that this cost is nondutiable. The applicant must identify, with clarity and specificity, any documentation which has been submitted which would establish that these materials are nondutiable.

The overhead charges (items 1-4) which you have asked us to review are listed on page 21 of the spreadsheet. Because the entry at issue was filed prior to the C.A.F.C. decision in Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484 (CIT 1993), 44 F.3d 1539 (CAFC 1994), we find that these costs are nondutiable pursuant to the authority of T.D. 39443 (1923). We note that our rulings with respect to entries filed on and after the date of the C.A.F.C. decision in Texaco, December 29, 1994, will follow the analysis of Ruling 112900 dated November 4, 1993, where we stated as follows:

As we stated in Ruling 112861, supra, it is Customs position that overhead relating to repair work is dutiable as part of the cost of the repair, i.e., the total cost or expense of the repair is dutiable. In contrast, overhead relating to a nondutiable item such as a modification is nondutiable, i.e., the total cost or expense of a nondutiable item is nondutiable. While Customs does not wish to see overhead broken-out or segregated as a separate item, our position on the dutiability of overhead, as stated supra, holds whether or not overhead is a separate item.
...
...It is Customs position that the total cost or expense of a foreign repair is dutiable. That total cost includes overhead attributable to the repair. Overhead is part of the shipyard's cost of doing business. In many cases in various businesses, overhead expense incurred by the vendor is recouped by including a provision for it in other costs, such as the labor cost.

HOLDING: [of Ruling 112900]

The protest is granted only with respect to any overhead which is related to nondutiable items; that overhead must be included in the cost or expense of the nondutiable items or clearly reflected as related to such nondutiable items on the pertinent invoices. The protest is denied with respect to all other overhead. [end of excerpt from Ruling 112900.]

HOLDING:

As detailed supra, the application is granted in part and denied in part.

Sincerely,

Chief,
Entry and Carrier Rulings Branch

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