HQ 113608 - Protest No. 2809-95-100891; Vessel Repair Entry No. C28-0189424-0; STRONG VIRGINIAN; V-1; Domestic Invoices; Cleaning; Modification; 19 U.S.C. ? 1466 - United States International Trade Commision Rulings

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HQ 113608

January 26, 1996

VES-13-18-RR:IT:EC 113608 GEV

CATEGORY: CARRIER

Chief, Liquidation Section II
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94126

RE: Protest No. 2809-95-100891; Vessel Repair Entry No. C28-0189424-0; STRONG VIRGINIAN; V-1; Domestic Invoices; Cleaning; Modification; 19 U.S.C. ? 1466

Dear Sir:

This is in response to your memorandum dated October 18, 1995, forwarding a protest and supporting documentation pertaining to the above-referenced vessel repair entry. Our findings in this matter are set forth below.

FACTS:

The STRONG VIRGINIAN is a U.S.-flagged vessel owned by Van Ommeren Shipping, Inc. of Stamford, Connecticut. The vessel incurred foreign repairs and purchases subsequently arriving in the United States at San Francisco, California on July 7, 1994. A vessel repair entry was timely filed on July 12, 1994.

Pursuant to an authorized extension of time, an application for relief, dated November 2, 1994, was timely filed. In Headquarters ruling 113191, dated December 29, 1994, Customs granted in part and denied in part the application for relief. The subject entry was subsequently liquidated on March 31, 1994. A protest dated June 29, 1994, was timely filed.

The protestant disagrees with Customs decision on the aforementioned application for relief with respect to the assessment of duty on certain costs for parts and materials stated to be purchased in the United States or imported duty paid prior to their foreign installation on the vessel. The parts and materials in question specified in the protest for duty-free treatment are as follows:

Exhibit 2 - C.F. Nienstadt invoice nos. B9390056 and B9360975
Exhibit 7 - STN Systemtechnik Nord invoice no. 08752276 Exhibit 16 -Serck COMO Gmbh invoice no. 09058 Exhibit 27 - Bismo Bulklift A/S invoice no. 93092 Exhibit 28 - Emder Schiffensausrusting invoice no. 6915 Exhibit 44 - Krupp Mak Diesel, Inc. invoice no. 416926 Exhibit 46 - Imatech invoice no. 83362
Exhibit 47 - Manotherm invoice no. 9301973 Exhibit 59 - Alfa-Laval Separation invoice no. 199305342
Exhibit 60 - Bisma Bulklift invoice no. 93139 Exhibit 66 - Wartsila Diesel invoice no. 705840 Exhibit 73 - Iron Pump invoice no. 59040
Exhibit 75 - Unitor invoice nos. 2295621 and 2296685 Exhibit 78 - Amot Controls Corp. invoice no. 33777 Exhibit 86 - Saacke Gmbh & Co. invoice no. 010169 Exhibit 88 - Seatrade International AB invoice no. 1568 Exhibit 89 - Renk Tacke Gmbh invoice no. 615425/3205 Exhibit 95 - Iron Pump invoice no. 64558
Exhibit 97 - Dixie Bearings invoice no. JA70376 Exhibit 103 - Krupp Mak Diesel, Inc. invoice nos. 418081, 418102 and 418112
Exhibit 104 - Krupp Mak Diesel, Inc. invoice nos. 417790, 417952 and 417399
Exhibit 107 - STN Systemtechnik Nord invoice no. 0861800
Exhibit 111 - Krupp Mak Diesel, Inc. invoice no. 418437 Exhibit 112 - Krupp Mak Diesel, Inc. invoice no. 418607 Exhibit 115 - Krupp Mak Diesel, Inc. invoice no. 418741 Exhibit 121 - Imatech invoice nos. 45059 and 45107 Exhibit 122 - Sandven Electronics A.S. invoice no. 15080
Exhibit 123 - Seatrade International AB invoice no. 1380
Exhibit 130 - Bismo Bulklift AS invoice no. 94005 and Atlas Elektronik of America, Inc. invoice no. 1372
Exhibit 134 - Como Gmbh invoice no. 04008 Exhibit 141 - Imatech invoice nos. 45107 and 45130 Exhibit 142 - Imatech invoice nos. 83907, 83908, 83909, 83923 and 45006
Exhibit 143 - Imatech invoice nos. 15438, 45007, 45014, 45059, 45069, 45070 and 84040
Exhibit 145 - Technischer Handel invoice no. 93009

It is the position of the protestant that none of the parts and materials covered by the above-referenced invoices are subject to duty under the vessel repair statute for the reason that subsection (a) of the statute imposes duty on the cost in a foreign country. The argument is made that since the purchases in question were made in the United States or imported into the United States and duty-paid prior to their use, there is no foreign cost subject to duty under the law. In addition to the invoices listed above, the protestant has submitted various import documentation,
including a Customs Entry Summary (CF 7501), in each exhibit covering parts and materials stated to be imported and duty-paid. The protestant has also provided a certification from the Secretary for Strong Virginian Navigation Company that the parts and materials in question (excluding those covered in Exhibit 75) were purchased in the United States and/or imported duty-paid into the United States (Exhibit 2(b)). The following are cited in support of the protestant's position: United States v. Wigglesworth, 2 Story 369; 28 Fed.Cas. 595 (1842); Eidman v. Martinez, 184 U.S. 578, 225 S.Ct. 515, 46 L.Ed. 697 (1902); Customs rulings 102154 (Exhibit C); 104700 (Exhibit D); 109408 (Exhibit E); Senate Reports 1-473, 71st Congress, 1st and 2d Sessions, April 15, 1929-July 3, 1930 (Exhibit F); House Reports 1-495, 71st Congress, 1st and 2d Sessions 1929-1930 (Exhibit G); Statement of Rep. Gene Snyder in the Congressional Record, dated March 9, 1982 (Exhibit H).

In regard to Exhibit 75, the protestant has submitted the following: a one-sentence telefax from an untitled employee of Unitor that the parts and materials covered by the invoices listed therein were manufactured in the United States (Exhibit 75(a)); and Customs rulings 110644 (Exhibit A) and 113216 (Exhibit B).

With respect to Exhibit 134, the protestant proffers an alternative claim for relief in alleging that the parts and materials referenced therein were incorporated a nondutiable modification to the vessel. In support of this claim the protestant has submitted the following: a copy of a letter explaining the purchase (Exhibit 134(b)); and Customs ruling 107177 (Exhibit M).

In addition to the cost of the parts and materials discussed above, the protestant also requests relief for cleaning costs listed on the following:

Exhibit 53 - Metalock Underwater invoice no. UMI1746 Exhibit 125 - Metalock Underwater invoice no. UMI1824

It is the position of the protestant that the cleaning costs in question are not dutiable since they were not required in preparation for or as the result of any repairs, and would have been accomplished regardless of whether repairs were performed. In support of this position the protestant has cited the following: Munson Steamship Lines v. United States, 42 Treas.Dec. 242, T.D. 39340 (1922) (Exhibit I); American Hawaiian Steamship Co. v. United States, 71 Treas.Dec. 1174, Abs. 36292 (1937) (Exhibit J); Bradley v. Bolles, L Abb., 596, 3 Fed.Cas. 1137) (Exhibit K); and Customs rulings 106509 (Exhibit L).

It should be noted that in Customs liquidation of the subject entry, the costs in question covered by Exhibits 53, 59, 66, 75, 78 and 125 were liquidated free of duty. Therefore, the protestant's claims with respect to these six exhibits is denied. However, we believe these costs were erroneously given duty-free treatment and if the protestant files a summons in the U.S. Court of International Trade pursuant to 28 U.S.C. ? 1581 contesting Customs decision on this protest, the Government will counterclaim with respect to these exhibits.

ISSUES:

1. Whether a domestic purchase of articles which are not manufactured or produced in the United States and which are placed aboard a U.S.-flagged vessel in a foreign shipyard, is subject to duty imposed under 19 U.S.C. ? 1466(a).

2. Whether evidence is presented sufficient to prove that the parts and materials referenced in Exhibit 134 were incorporated in a modification to the hull and fittings of the vessel so as to render them nondutiable under 19 U.S.C. ? 1466(a).

LAW AND ANALYSIS:

Title 19, United States Code, ? 1466(a) (19 U.S.C. ? 1466(a)), provides in pertinent part for the payment of an ad valorem duty of 50 percent of the cost of "...equipments, or any part thereof, including boats, purchased for, or the repair parts or materials to be used, or the expenses of repairs made in a foreign country upon a vessel documented under the laws of the United States..."

Subsection (d)(2) of 19 U.S.C. ? 1466 provides that duty is to be remitted or refunded if the owner or master of a vessel provides evidence regarding vessel-related expenditures that:

...such equipments or parts thereof or repair parts or materials were manufactured or produced in the United States, and the labor necessary to install such equipments or to make such repairs was performed by residents of the United States, or by members of the regular crew of such vessel...

The protestant states, with emphasis, on page 8 of the protest attachments, that "This is not a request for remission under 19 U.S.C. ? 1466(d)(2)...The parts in issue were purchased in the United States or imported into the United States prior to their use." The invoices and import documentation submitted make it quite clear that the articles under consideration are of foreign manufacture or production and were first imported into the United States before being purchased for overseas installation by the vessel operator.

Parts and materials of foreign origin which are imported into the United States prior to their use in foreign shipyard operations have been subject to particular treatment by the Congress of the United States. On August 20, 1990, the President signed into law the Customs and Trade Act of 1990 (Pub.L. 101-382), ? 484E of which amended the vessel repair statute by adding a new subsection (h). Subsection (h) included two elements, the second of which is relevant to the present matter and provided as follows:

(h) The duty imposed by subsection (a) of this section shall not apply to--

(2) the cost of spare repair parts or materials (other than nets or nettings) which the owner or master of the vessel certifies are intended for use aboard a cargo vessel, documented under the laws of the United States and engaged in the foreign or coasting trade, for installation or use on such vessel, as needed, in the United States, at sea, or in a foreign country, but only if duty is paid under the appropriate commodity classifications of the
Harmonized Tariff Schedule of the United States upon first entry into the
United States of each such spare part purchased in, or imported from, a foreign country.

The effective date of the amendment was stated as applying to:

(1) any entry made before the date of enactment of this Act that is not liquidated on the date of enactment of this Act, and (2) any entry made--
(A) on or after the date of enactment of this Act, and
(B) on or before December 31, 1992.

Section 1466 was more recently amended on December 8, 1994, by ? 112(b) of Pub.L. 101-465, in part by reinstatement of the previously expired subsections (h)(1) and (2), the wording of which remained unchanged from their previous enactment. The provision, which expired on December 31, 1992, and again became effective on January 1, 1995, was non-existent during that intervening two-year period. The vessel repair entry in question was filed during that period. Consequently, the provisions of subsection (h)(2) are inapplicable to the subject entry.

The Congress, in enacting and re-enacting a provision extending special treatment under the vessel repair statute to parts and materials proven to have been imported into the United States prior to their use in foreign vessel repair operations (i.e., subsection (h)(2)), has provided irrefutable evidence that domestic purchases of imported parts and materials are subject to vessel repair duty unless excepted thereunder. The fact that it was necessary to amend the statute in order to except imported parts and materials from duty under ? 1466, trumps any argument which may be advanced concerning administrative interpretations of the law prior to amendment.
(See Headquarters ruling 113499, dated December 14, 1995)

Accordingly, since the Customs rulings cited by the protestant (Exhibits C, D, and E) all pre-date the above-referenced amendment to ? 1466, they are inapplicable to the protestant's claim. With respect to the judicial authority cited for the proposition that the language of require duty on purchases made in the United States or on parts imported prior to their use on a vessel within the purview of the statute (United States v. Wigglesworth, 2 Story 369; 28 Fed.Cas. 595 (1842); and Eidman v.

Martinez, 184 U.S. 578, 225 S.Ct. 515, 46 L.Ed. 697 (1902)), we note that counsel cited the same authority in Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d. 1539 (1994). In refuting counsel's argument that the aforementioned judicial precedents support the position that the language of ? 1466(a) is ambiguous, the court stated, in pertinent part:

"That the language is broad and general in nature does not mean it is ambiguous. To the contrary, the meaning is quite clear--the broad, general language means its application is broad in scope.
Absent the impossible task of having Congress list in the statute every type of repair expense that it intended be encompassed within the statute the statute, the statute could not be any clearer on its face. Hence, this is not a case like...United States v.
Wigglesworth, 28 Fed.Cas. 595, 96-597
(C.C.D.Mass.1842)
(No. 16,690) or Eidman v. Martinez, 184 U.S. 578, 590-591, 22 S.Ct. 515, 520-521, 46 L.Ed. 697 (1902))...where the statutory language was unclear or where an attempt was made to have read into it words which were not there." 44 F.3d at 1544

Assuming, arguendo, the ambiguity proffered by counsel, we note that the legislative history contained within the subject protest (Exhibits F, G, and H) submitted for the purpose of determining the intent of Congress in enacting the statute pertains to subsequent amendments to the statute as originally enacted. In this regard, the U.S. Court of Appeals for the Federal Circuit (CAFC) has stated that "[o]ther than the words of the statute that Congress enacted in 1866, we know of no statement made by the 1866 Congress which sheds light upon the purpose behind the statute." (footnote 3 at 44 F.3d 1544). However, the CAFC at 44 F.3d 1544, 1545, goes on to state that the courts have consistently held that the vessel repair statute was enacted "to equalize, by imposition of the prescribed duty, the relative costs of repairs performed by foreign versus domestic labor, in order to encourage U.S. ship owners to employ U.S. labor whenever possible." Mount Washington Tanker Co. v. United States, 665 F.2d 340, 344 (CCPA 1981); see also South Corp. v. United States, 690 F.2d 1368, 1372, 1 Fed.Cir. (T) 1, 5 (1982) ("In enacting ? 1466(a) Congress sought to protect and encourage American ship repair facilities."; Sea-Land Service, Inc. v. United States, 683 F.Supp. 1404, 1409 (CIT 1988) ("It is evident from the legislative history of 19 U.S.C. ? 1466, a revision of section 466 of the Tariff Act of 1930, that the basic purpose of the foreign repair statute was to protect American labor."); Erie Navigation Co. v. United States, 475 F.Supp. 160, 163 (Cust.Ct. 1979) ("It is clear that the purpose of section 1466(a) was to protect the American shipbuilding and repairing industry."); United States v. Gissel, 353 F.Supp. 768, 772 (S.D.Tex.1973) (noting that "it was Congressional policy to encourage the obtaining of American flag vessel repairs in American shipyards"), aff'd, 493 F.2d 27 (5th Cir.), cert. denied, 419 U.S. 1012, 95 S.Ct. 332, 42 L.Ed.2d 286 (1974). It is noteworthy that the protection of American labor and industries is in fact reflected in Exhibit G.

Accordingly, Customs position that the foreign-manufactured parts and materials in question which were purchased in the U.S. or imported duty-paid and subsequently installed overseas are dutiable is supported by the fact that the provisions of ? 1466(h)(2) were non-existent at the time of the subject entry and later re-enacted, the inapplicability of the remaining statutory exceptions to the assessment of duty, the judicial rejection of the alleged ambiguity of the language of ? 1466(a), and the intent of Congress that the purpose of the vessel repair statute is to protect and encourage the use of U.S. shipbuilding and repair facilities.

With respect to the alternative claim pertaining to Exhibit 134 (i.e., that the invoiced articles referenced therein were incorporated in a nondutiable modification), we note that 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.

Upon reviewing the documentation submitted with respect to Exhibit 134, it is apparent that Exhibit 134(b) contains merely a scintilla of an explanation of the work involved (i.e., a single passage highlighted by the protestant which only states "CONVERSION FROM ENG. COOLING WATER OPERATION INTO STEAM JET LIQUID HEATING"). In regard to Customs ruling 107177 (Exhibit M), it holds that, "...the work on the No. 5A hold, the cargo pump, the slop line, the cargo main block valve, the remote operator actuator and the spectacle block constitute additions to the hull and fittings rather than repairs." However, the protest fails to prove the relevance between that ruling and the costs at issue in Exhibit 134. Accordingly, the evidence presented is insufficient to prove that the invoiced articles covered by Exhibit 134 meet the criterion of a nondutiable modification as discussed above.

HOLDINGS:

1. Absent the applicability of 19 U.S.C. ? 1466(h)(2), a domestic purchase of articles which are not manufactured or produced in the United States and which are placed aboard a U.S.-flagged vessel in a foreign shipyard is subject to duty imposed under 19 U.S.C. ? 1466(a). Accordingly those invoiced articles covered by the following exhibits are dutiable: Exhibits 2, 7, 16, 27, 28, 44, 46, 47, 60, 73, 86, 88, 89, 95, 97, 103, 104, 107, 111, 112, 115, 121, 122, 123, 130, 134, 141, 142, 143, 145.

2. Evidence is presented insufficient to prove that the parts and materials referenced in Exhibit 134 were incorporated in a modification to the hull and fittings of the vessel so as to render them nondutiable under 19 U.S.C. ? 1466(a).

Accordingly, the protest is denied in its entirety.

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 no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing 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 Ruling Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

Director

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