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HQ 112974





July 18, 1995

VES-13-18-R:IT:C 112974 BEW

CATEGORY: CARRIER

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

RE: Petition for Review; Vessel Repair Entry No. C31-0005026-0, ARCO JUNEAU, Voyage CF 432; Port of Arrival: Valdez, Alaska; Date of Arrival: March 6, 1993; Inspection; Modification; Segregation of Costs

Dear Sir:

This is in response to your memorandum dated December 1, 1993, which forwards for our consideration a petition for relief from duties assessed pursuant to 19 U.S.C. §1466 filed in connection with the ARCO JUNEAU, vessel repair entry number C31-0005026-0. Our review of this matter has been delayed pending the outcome of ongoing litigation which has now been resolved. Our findings on this matter are set forth below.

FACTS:

The ARCO JUNEAU is an American-flag vessel owned by ARCO Marine, Inc. The vessel had foreign shipyard work performed during the period of February 2, 1993 - February 25, 1993. Subsequently, the vessel arrived in the United States at Valdez, Alaska on March 6, 1993, and a vessel repair entry was filed on the same day. An application for relief dated May 20, 1993, was timely filed seeking remission from vessel repair duties. By our decision of August 18, 1993, 112789 DEC, we ruled as follows on certain items:

Invoice 710 and Invoice 714 (butterworth opening)

The applicant contends that these two invoices for the construction of the butterworth openings constitutes a non-dutiable modification. However, a closer examination of the invoices reveals that work performed on the existing pipes contained dutiable repairs. Specifically, the invoice makes reference to the "renewal" of all cover gaskets. Since the applicant did not document the segregation of costs in these invoice, both invoices are dutiable in their entirety. Headquarters Ruling 108567 (Sept. 10, 1986).

Invoice 901 (gyro compass installation)

Customs is satisfied that the vast majority of the work described in this invoice constitutes a non-dutiable modification. However, the renewal of wiring is a dutiable operation. Since the cost of this repair is not segregated from the balance of the item, this complete invoice is deemed dutiable. Headquarters Ruling 108567 (Sept. 10, 1986). Unless and until the applicant can satisfactorily itemize the costs associated with each aspect of the invoice, this item is dutiable.

Invoice 908 (fathometer)
Invoice 909 (radar replacement)
Invoice 911 (towing girder renewed)

Invoice 908 describes the operation to be performed as "work to renew Owner's furbished new hull transducer" and Invoice 909 describes the work to be performed as a renewal of the vessel's radar. In addition, Invoice 911 describes various renewal operations with respect to the installation of the new towing system. Customs has consistently held that in order for an operation to be a repair there must be a restoration or a making over; the word "repair" contemplates an existing structure which has become imperfect by reason of the action of the elements or otherwise. Admiral Oriental Line v. United States, T.D. 44886 (1931). In this case, it is clear from the invoice that both of these operations were carried out in an effort to restore the fathometer (Invoice 908), the radar (Invoice 909), and the towing girder system (Invoice 911). Absent evidence of segregating non-dutiable costs from dutiable costs, these items are dutiable pursuant to 19 U.S.C. §1466. The staging and transportation costs associated with Invoice 909 and Invoice 911 are not subject to duty.

Invoice 109 (tailshaft inspection)

This invoice is for the operations performed on the vessel in connection with the tailshaft inspection and the stern tube after seal renewal. The invoice contains itemized costs for staging and rigging which are not subject to the assessment of vessel repair duties. The balance of the
invoice, however, is subject to duty. Customs reaches this conclusion based on our review of the numerous items some of which the applicant clearly acknowledges as repairs. The remainder of the invoice is dutiable because it contains many items which are ordinarily considered dutiable and because there is no documentation depicting separate charges for each item. When there are no supporting documents segregating costs, Customs holds the entire invoice dutiable. In particular, Customs finds items h, m, n, and p subject to vessel repair duty. Unless and until the applicant can produce authenticated documentation of the cost of each item, the entire invoice is dutiable.

Invoice 301 (turbine couplings)

The applicant contended that no duty is owed with respect to the cost of the inspection of the flexible couplings. . . . Following the rules set forth above, the Customs Service finds that while the ABS inspection and testing of the couplings is not subject to duty, this entire invoice is dutiable because it contains dutiable items, but fails to segregate dutiable items from non-dutiable items. Specifically, the Customs Service finds to "hone off edges," "to refit the casing with new gaskets," and to "renew joint packing" to be dutiable repairs absent evidence to the contrary. Accordingly, this entire invoice is subject to vessel repair duties.

The petition centers around the aforementioned items. The petitioner contends that the subject items were modifications and inspections, and that the costs documented under the subject invoices constitute non-dutiable modifications and repairs. In support of its contention, the petitioner has submitted an invoice detailing the operations performed and a statement that the subject items do not constitute a restoration of the vessel due to damage or deterioration. In addition, an itemized statement segregating the repair costs pertaining to certain items has also been submitted.

ISSUE:

Whether certain foreign shipyard procedures and costs for which the petitioner seeks relief are dutiable pursuant to 19 U.S.C. § 1466.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466(a), 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 be employed 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 constitutes 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.

After a complete review of the petition, we find as follows:

Invoice 710 and Invoice 714 (butterworth opening)

Based on the evidence, we find that the cost of the repairs to the existing pipes contains dutiable repairs and the cost of $5,570 for this repair, which is a dutiable cost, is separated from the non-dutiable modification repairs. Accordingly, we find that the remaining costs associated with these items to be non-dutiable.

Invoice 901 (gyro compass installation)

Customs is satisfied that the vast majority of the work described in this invoice constitutes a non-dutiable modification. The petitioner has submitted a breakdown of cost associated with this item. The renewal of wiring is a dutiable operation. The remaining cost of this repair is non-dutiable.

Invoice 908 (fathometer)
Invoice 909 (radar replacement)
Invoice 911 (towing girder renewed)

The evidence submitted sustains that these repairs are non-dutiable modifications to the vessel's hull and fittings. Accordingly, we find these items to be non-dutiable.

Invoice 109 (tailshaft inspection)

This invoice is for operations performed on the vessel in connection with the tailshaft inspection and the stern tube after seal renewal. The invoice contains itemized costs for staging and rigging which are not subject to the assessment of vessel repair duties. The evidence submitted sustains a finding the new gaskets and joint packing were necessary to reseal the tailshaft after it had been opened for inspection, and that no repairs were performed. Accordingly, we find this item to be non-dutiable.

Invoice 301 (turbine couplings)

The evidence submitted with the petition reveals that the "hone off edges" repair work was canceled, and that new gaskets and joint packing were required after the item had been opened for inspection. Accordingly, we find the repair work performed in this item to be non-dutiable.

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, removal of debris and protective coverings for repair work are dutiable under 19 U.S.C. § 1466. In view of the Texaco Case, the cost of removal of dirt and debris associated with dutiable repairs is dutiable, and Item 002 - Services and Facilities, sub-item n. Protective Coverings, is dutiable.

HOLDING:

Following a thorough review of the evidence submitted as well as analysis of the applicable law and precedents, we have determined that the Petition for Review should be allowed in part and denied in part as set forth in the Law and Analysis portion of this ruling.

Sincerely,

Arthur P. Schifflin

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