HQ 226472 - Protest No. 1303-94-100323; Vessel Repair Entry No. C13-0024088-9; M/V FAUST; V-115; Owner/Vessel-Supplied Materials; Modifications; Warranty; Sufficiency of Protest; 19 CFR Part 174; 19 U.S.C. ? 1466 - United States International Trade Commision Rulings

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HQ 226472

December 29, 1995

VES-13-06-RR:IT:EC 226472 GEV

CATEGORY: CARRIER

Chief, Residual Liquidation and Protest Branch U.S. Customs Service
6 World Trade Center
New York, New York 10048-0945

RE: Protest No. 1303-94-100323; Vessel Repair Entry No. C13-0024088-9; M/V FAUST; V-115; Owner/Vessel-Supplied Materials; Modifications; Warranty; Sufficiency of Protest; 19 CFR Part 174; 19 U.S.C. ? 1466

Dear Sir:

This is in response to your memorandum dated October 6, 1995, forwarding the above-referenced protest and supporting documentation. You specifically request our review of the following items listed on Lloyd Werft invoice no. 0-63: B.13; B.14; B.17; B.19; B.19-.01; B.20; B.23; B.27; B.36; B.36.01; B.37; B.44; B.54; and B.74. With regard to these items, our ruling on this matter is set forth below.

FACTS:

The M/V FAUST is a U.S.-flagged vessel operated by International Marine Carriers, Inc. of Mineola, New York. The vessel incurred foreign shipyard expenses in Bremerhaven, Germany, during July 23 - August 6, 1993. Subsequent to the completion of the work the vessel arrived in the United States at Baltimore, Maryland, on August 22, 1993. A vessel repair entry was timely filed on the day after arrival.

An application for relief from the assessment of vessel repair duties, dated February 1, 1994, was denied in full by Customs New York Vessel Repair Liquidation Unit (VRLU) due to its having been untimely filed. The vessel operator's agent (American Marine Consultants, Inc.) was so notified by a letter from the Chief, Residual Liquidation and Protest Branch, dated May 6, 1994, which also stated that Customs was proceeding with the liquidation of the subject entry. In addition, the aforementioned letter informed the agent that should the vessel operator request further consideration of this matter, a protest must be filed pursuant to Part 174, Customs Regulations within 90 days of the date of liquidation.

The subject entry was liquidated on July 29, 1994, for duty in the amount of $348,895.50. Counsel, on behalf the vessel operator, filed a timely protest (CF 19), dated October 27, 1994, marked it as an application for further review, and attached a three page document stating the following: (1) the dutiable amount Customs assigned to the entry is excessive and cannot be calculated from the invoices covering the entry; (2) the correct amount of duty due is $83,634.71 based upon the attached extract of dutiable items appearing on the shipyard (Lloyd Werft) invoice nos. 0-63 and 0-65 rather than the aforementioned figure calculated by Customs which includes $50,000 in duty to cover owner/vessel-supplied materials assessed as a result of the failure to respond to a Notice of Action (CF 29), dated February 25, 1994, from the VRLU requesting additional documentation to support that claim; (3) the factual material supporting the claims for relief are Lloyd Werft invoice nos. 0-63 and 0-65 (copies of which were attached to the CF 19); and (4) the legal bases supporting the claims for relief are 19 U.S.C. ? 1466(a), 19 CFR
Oriental Line, et al., 18 CCPA 137, T.D. 44359 (1930), and States Steamship Co. v. United States, T.D. 49531 (1938) and cases cited therein.

Additional documentation submitted by the VRLU for our review in consideration of this matter includes the following: (1) a copy of the Notice of Action (CF 29) referenced above; (2) copies of invoices submitted in response thereto; (3) a copy of a letter from International Marine Carriers, Inc., to American Marine Consultants, Inc., dated April 7, 1994, commenting on various items appearing on Lloyd Werft invoice no. 0-63 and listed on the aforementioned Notice of Action; (4) a copy of a letter from American Marine Consultants, Inc., dated April 18, 1994, to the VRLU enclosing the aforementioned April 7, 1994, letter and further commenting on several of the items under consideration; and (5) a letter from counsel to the VRLU, dated September 6, 1995, further discussing the foreign shipyard charges in question and attaching various drawings of several work items listed on Lloyd-Werft invoice 0-63 as well as a copy of a U.S. Coast Guard Certificate of Inspection pertaining to several work items under consideration (Exhibits A, B and C).

ISSUE:

Whether the documentation submitted on behalf of the vessel operator protesting Customs assessment of vessel repair duties pursuant to 19 U.S.C. ? 1466 on the following items on Lloyd-Werft invoice no. 0-63 and contained within the subject entry is sufficient to grant relief: B.13; B.14; B.17; B.19; B.19.01; B.20; B.23; B.27; B.36; B.36-.01; B.37; B.44; B.54; and B.74.

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..."

The applicable Customs Regulations promulgated pursuant to 19 U.S.C. ? 1466 are found at 19 CFR ? 4.14. Pursuant to 19 CFR protest under 19 CFR Part 174 (promulgated pursuant to 19 U.S.C. a repair as dutiable or against the decision denying the remission or refund of vessel repair duties. With regard to the content of a protest, the Customs Regulations clearly provide that the protest must contain, "[t]he nature of, and justification for the objection set forth distinctly and specifically with respect to each category, payment, claim, decision, or refusal;..." (19 CFR ? 174.13(a)(6)) The requisite specificity for a Customs protest is further evident from the CF 19 itself where Box 9 thereon contains, in pertinent part, the following instruction:

"With respect to each category of merchandise, set forth, separately,
(1) each decision protested, (2) the claim of the protesting party, and
(3) the factual material and legal arguments which are believed to support the protest. All such material and arguments should be specific. General statements of conclusions are not sufficient."
(Emphasis added)

Furthermore, the left-hand margin of Box 9 contains the following heading, "SECTION III - DETAILED REASONS FOR PROTEST AND/OR FURTHER REVIEW". (Emphasis added)

Should a protestant wish to amend his/her protest, such amendment may occur "...at any time prior to the expiration of the 90-day period within which such protest may be filed..." (19 CFR ? 174.14(a) citing 19 CFR ? 174.12(e) which provides that a protest shall be filed within 90 days of either the date of notice of liquidation or reliquidation). With respect to the submission of additional arguments in support of a valid protest after the 90-day time period has expired, such arguments may be considered at any time prior to disposition of the protest. (19 CFR ? 174.14(a) citing 19 CFR ? 174.28)

Upon reviewing the protest and supporting documentation submitted, our determinations with respect to the specific items forwarded for our review are as follows.

It is readily apparent that neither the CF 19 nor counsel's attachments thereto specify the particular invoiced items for which relief is requested and the corresponding legal arguments justifying Customs granting such relief. In Box 9 of the CF 19 counsel has merely provided the statement, "Please see attached." The referenced attachments not only fail to identify the specific work items listed on the invoices for which relief is requested, they also fail to particularize the applicable legal bases upon which relief should be granted. The legal bases which are proffered by counsel in the aforementioned attachments are merely set forth as a list of administrative and judicial decisions without any attempt to correlate them to a specific invoiced item. The extract - 4 -
of the invoices included in the attachments merely lists miscellaneous items appearing thereon reflecting their charges in deutschmarks as listed on the invoices. Consequently, the CF 19 and its attachments, in and of themselves, are deficient with respect to 19 CFR ? 174.13(a)(6).

In regard to the additional documentation not submitted with the CF 19 and the accompanying attachments, yet nonetheless forwarded by the VRLU for our review, our comments are as follows. The letter dated April 7, 1994, from American Consultants, Inc. to American Marine Consultants, Inc. is an enclosure to the letter dated April 18, 1994, from American Marine Consultants, Inc. to the VRLU. They collectively respond to the Notice of Action sent by the VRLU, as do various invoices submitted, and will thus be considered with the protest. In addition, although counsel's letter of September 6, 1995, and the information enclosed therewith were not only filed well beyond 90 days from the date of liquidation of the subject entry (July 29, 1994), but also well beyond the date the protest was filed (October 27, 1994), pursuant to 19 CFR ? 174.28 Customs will consider the additional arguments therein inasmuch as counsel's letter was submitted prior to the disposition of this protest.

Of the items on Lloyd Werft invoice no. 0-63 for which the VRLU seeks our review, the protestant states that Item B.13 has no invoice with respect to the parts and materials involved in this work since such articles were allegedly supplied by the shipbuilder pursuant to a warranty. Customs does not consider a warranty agreement in and of itself to be a basis for relief from duty assessed pursuant to the vessel repair statute. (C.S.D 81-50) Accordingly, the cost of the parts and materials used in Item B.13 is dutiable. In instances such as this where no invoice is provided, Customs has taken the position that it will advance the entered costs on liquidation to an amount in keeping with the experience of the VRLU of costs on similar articles. (Headquarters rulings 108455 and 108456).

Item B.14 includes anodes claimed to be owner/vessel-supplied. However, the protestant has only provided a foreign invoice from Jotun Sverige AB (no. 309040) listing the anodes and their cost. This, without more, fails to prove that these articles were manufactured in the U.S. or purchased foreign and duty-paid prior to delivery to the vessel as is claimed by the protestant. Likewise, the owner/vessel-supplied paint covered by Jotun-Valspar Marine Coatings invoice no. 2337973 fails to prove U.S. manufacture or duty-paid status. In addition, Item B.14 contains the non-segregated cost of protective coverings which were held dutiable pursuant to 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). Pursuant to C.I.E.s 1325/58 and 565/55 costs may not be remitted where the invoice does not show a breakdown of what is and is not dutiable. Accordingly, the aforementioned costs in Item B.14 are dutiable.

Item B.17 covers the cost of alleged owner/vessel-supplied paint in addition to the cost of cleaning done before and after painting the hull. The paint in question is covered by invoices from Jotsun-Valspar Marine Coatings (nos. 2337973 and 2339332) which, in and of themselves, fail to prove that the paint was manufactured in the U.S. or purchased foreign and duty-paid prior to delivery to the vessel as is claimed by the protestant. Furthermore, the cleaning done before
and after the painting is dutiable pursuant to C.I.E. 429/61 and Texaco, supra, respectively. Accordingly, Item B.17 is dutiable in its entirety.

Item B.20 includes alleged vessel-supplied anodes which are also covered by Jotun Sverige AB invoice no. 309040 (see discussion on Item B.14, above). Accordingly, the cost of the anodes used in Item B.20 is dutiable.

Item B.23 covers parts and materials used in conjunction with a tailshaft survey and inspection. These articles are alleged to be owner/vessel-supplied and are covered by an invoice from Blohm & Voss of Hamburg, Germany. This invoice, however, fails to prove that these parts and materials were either manufactured in the U.S. or purchased foreign and duty-paid prior to delivery to the vessel as is claimed by the protestant. Accordingly, these parts and materials are dutiable.

Further in regard to Item B.23, counsel randomly cites to C.S.D. 80-195 in the protest attachments, thereby alluding to the duty-free treatment Customs accords certain surveys which are undertaken to meet the specific requirements of a governmental entity, classification society, insurance carrier, etc. To that end, counsel's September 6, 1995, letter encloses a copy of a U.S. Coast Guard inspection certificate (Exhibit B). In regard to the dutiability of inspection/survey costs, we note that C.S.D. 79-277 also states that, "[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 American Bureau of Shipping (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, we 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 a 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 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 ABS). 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 labeled "continuous" or "ongoing" is dutiable.

Moreover, we note that C.S.D. 79-277 does not exempt repair work done by a shipyard in preparation of a required survey from duty. 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.

With respect to Item B.23, the costs covered thereunder were done in conjunction with shipyard work and were not the actual costs of the U.S. Coast Guard surveyors. Furthermore, the U.S. Coast Guard certificate of inspection is silent with respect to the requirement of the aforementioned inspection. Accordingly, the cost of the tailshaft survey covered in Item B.23 and the parts and materials used therein covered by the Blohm & Voss invoice are dutiable. In addition, we also note that the cleaning costs appearing under this item were pursuant to dutiable repairs and are therefore dutiable pursuant to C.I.E. 429/61.

Item B.27 includes the cost of alleged owner/vessel-supplied paint covered by Jotun-Valspar Marine Coatings invoice no. 2337973. As discussed in Item B.17 above, the cost of this paint is dutiable.

Item B.37 includes the cost of alleged owner/vessel-supplied valves covered by World Wide Metric invoice no. 21544. However, this invoice in and of itself fails to prove that the valves used were either manufactured in the U.S. or imported and duty-paid prior to delivery to the vessel as is claimed by the protestant. Accordingly, these valves are dutiable.

Item B.54 includes the cost of alleged owner/vessel-supplied door closers covered by Eastern Industrial Supply Corp. invoice no. 7417. However, this invoice in and of itself fails to prove that these door closers were either manufactured in the U.S. or imported and duty-paid prior to delivery to the vessel as is claimed by the protestant. Accordingly, these door closers are dutiable.
Item B.74 includes the cost of alleged owner/vessel-supplied paint covered by Jotun-Valspar Marine Coatings invoice nos. 2337973 and 2339332 which, in and of themselves fail to prove that this paint was either manufactured in the U.S. or imported and duty-paid prior to delivery to the vessel as is claimed by the protestant (see discussion of Items B.17 and B.27, above). Accordingly, the paint included in Item B.74 is dutiable.

Of the remaining five items for which the VRLU seeks our review (Items B.19, B.19.01, B.36, B36.01, and B.44), all are alleged to constitute nondutiable modification costs. 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.

Items B.19 and B.19.01 cover the installation of an Impressed Current Cathodic Protection (ICCP) System. The shipyard invoice characterizes this as a "new" system installation. In support of this claim, counsel's letter of September 6, 1995, encloses a copy of an original hull drawing showing no cathodic protection system and guidance information and drawings on the new impressed current cathodic protection system installation (Exhibit A of counsel's letter). Upon reviewing the aforementioned information, including the invoice description as well as counsel's submissions, we have determined that Items B.19 and B. 19.01 cover the installation of a new system (as opposed to replacing a defective system) that meets the requisite attachment criterion as discussed above in that it constitutes the incorporation of a labyrinth of electronic components throughout the hull and fittings of the vessel. The nature of this electronic installation is such that it will in all likelihood remain on board the vessel during an extended lay- - 9 -
up. Furthermore, the protection it provides the vessel enhances its electronic operation and efficiency. Accordingly, Items B.19 and B.19.01 constitute a nondutiable modification.

Items B.36 and B.36.01 cover an alleged "Fwd Sea Chest Vent Modification". The shipyard invoice describes this work as converting "existing sea chest steam piping into a vent line." (Emphasis added) Consequently, although the invoice describes this work as a modification, it is not readily apparent that this is a new installation as opposed to work done to repair an existing defect. Counsel's submission (drawings attached as Exhibit C to the September 6, 1995, letter) provides no clarification as to this criterion notwithstanding her bald allegation that the vent pipe did not exist before its installation under this item. While the method of attachment evidenced on the invoice suggests a permanent incorporation into the hull of the vessel which would enhance the vessel's operation and efficiency and which would remain on board the vessel during an extended lay-up, the evidence submitted is insufficient to show that this work constituted a modification rather than repairs to a deficient portion of the vessel. Accordingly, Items B.36 and B.36.01 are dutiable.

Item 44 covers an alleged ballast line sleeve modification. While the invoice description and related drawings do in fact depict the work in question, it again is not readily apparent that this particular work meets the requisite criteria of a modification as discussed above rather than the repair of an existing defect. Accordingly, in the absence of evidence to the contrary, Item 44 is dutiable.

In regard to the protestant's claim that Customs should not assess $50,000 in duty to cover alleged owner/vessel-supplied materials referenced in work items appearing on invoice no. 0-63, the protestant should know that such assessment was not an arbitrary, punitive measure for failure to respond to the aforementioned Notice of Action but rather was an action taken on the part of the VRLU to protect against a loss of revenue in the absence of specific cost evidence (i.e., invoices). In fact, Customs received and considered invoices sent in response to the Notice of Action which cover certain of the costs at issue. The invoices in question covering the parts and materials for which our review is sought (i.e., Jotun Valspar invoice nos. 2337973 and 2339332, World Wide Metric invoice no. 21544, Eastern Industrial Supply Corp. invoice no. 7417, and Jotun Sverige AB invoice no. 309040) cover duty in the amount of $47,162.13. Customs will therefore reliquidate this entry to reflect the aforementioned exact amount of duty due.

In addition, we note that several of the invoices reviewed cover parts and materials used in more than one item appearing on Lloyd Werft invoice no. 0-63 (e.g., Jotun Sverige AB invoice no. 309040 covers anodes used in Items B.14 and B.20; Jotsun-Valspar Marine Coatings invoice nos. 2337973 and 2339332 cover paint used in Items B.14, B.17, B.27 and B.74). In view of the fact that the protestant did not provide an allocation between the invoiced costs and the items to which they pertain, Customs will allocate such costs against the affected items.

HOLDING:

In regard to the fourteen items for which our review is requested, with the exception of Items B.19 and B.19.01 which constitute nondutiable modification costs, the documentation submitted on behalf of the vessel operator protesting Customs assessment of vessel repair duties pursuant to 19 U.S.C. ? 1466 is insufficient to grant relief. However, Customs will reliquidate this entry to more accurately reflect the costs appearing on those invoices covering alleged owner/vessel-supplied parts and materials received in response to Customs Notice of Action.

Accordingly, the protest is granted in part and denied in part.

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,

William G. Rosoff

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