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HQ 113681

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February 3, 1997

VES-13-18-RR:IT:EC 113681 GEV

CATEGORY: CARRIER

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

RE: Vessel Repair Entry No. C27-0147654-4; Modification; General Service; Parts; Survey; CHIEF GADAO; V-162; 19 U.S.C. ? 1466

Dear Sir:

This is in response to your memorandum dated June 14, 1996, forwarding an application for relief from duties assessed pursuant to 19 U.S.C. ? 1466 with supporting documentation. You request our review of Items 1, 3 and 8 listed on the CF 226. Our findings are set forth below.

FACTS:

The CHIEF GADAO is a U.S.-flag vessel, formerly owned by American President Lines, Inc. ("APL"), and known as the PRESIDENT GRANT, now owned by Matson Navigation Company ("Matson"). The vessel was sold by APL to Matson on January 2, 1996, and underwent foreign shipyard work during March of 1996. Subsequent to the completion of the work the vessel arrived in the United States at San Pedro, California, on March 26, 1996. A vessel repair entry was untimely filed on April 10, 1996.

An application for relief, dated May 20, 1996, was timely filed. Included with the application was the following supporting documentation: shipyard invoices; drawings; an Entry Summary Continuation Sheet (CF 7501-A); a spreadsheet prepared by the applicant; and documentation from the American Bureau of Shipping (ABS).

ISSUE:

Whether the foreign costs contained within the subject entry for which our review is sought are dutiable under 19 U.S.C. ? 1466.

LAW AND ANALYSIS:

Title 19, United States Code, ? 1466 (19 U.S.C. ? 1466), 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 Customs Regulations promulgated pursuant to 19 U.S.C. ? 1466 are set forth in title 19, Code of Federal Regulations, ? 4.14 (19 CFR ? 4.14). With respect to the filing of a vessel repair entry, we note that ? 4.14(b)(2) provides, in pertinent part, that an "entry shall be filed with the appropriate Customs officer at the port of first arrival within five working days after arrival." The entry in this case was filed 11 working days after the arrival of the vessel. Consequently, the failure to make an entry as required necessitated your referral of this matter to the Fines, Penalties & Forfeitures Officer in the Port of Los Angeles for appropriate penalty action (see 19 CFR

Item 1 on the CF 226 designated for our review covers work alleged to be modifications to not only the galley of the vessel, but also to its container stowage capacity thereby enabling the vessel to carry eleven rows of 24' containers in combination with the existing 40' container stowage. This work, which is stated to improve the vessel's utilization and efficiency, is depicted on the aforementioned drawings (Enclosures A-D) and detailed on Hyundai Mipo Dockyard Co., Ltd., "Hyundai" invoice nos. 960013-A and 960013-B (Enclosures E and F).

In regard to these claims, 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 to support the applicant's modification claims, we have determined that the work done to the galley meets the requisite criteria for such a designation (see Enclosures D and F). With regard to the alleged container stowage modification, Items 1-5 and 10 on Hyundai invoice no. 960013-A (Enclosure E) also appear to support such a claim. Items 6-9 on the aforementioned invoice involve work alleged to be necessitated as a
result of a change in the vessel's ownership and are therefore claimed to be nondutiable. Upon reviewing these items, it is readily apparent that Items 8 (changing the vessel's name, hailing port, stack insignia, etc.) and 9 (replacing the APL logo with that of Matson) are a direct result of the ownership change and were not accomplished incident to maintenance or restorative painting. Consequently, these items are not dutiable (see Headquarters ruling letter 226968, dated May 31, 1996, holding the same such costs nondutiable). However, our review of the record does not lead us to the same conclusion with respect to the costs listed in Items 6 and 7 which cover dutiable painting and cleaning in preparation thereof.

Item 11 of Hyundai invoice 960013-A (Enclosure E) covers what is described as "General Service for Modification" and includes costs for the following services: wharfage; tuggage and mooring/unmooring; fire main service; fire patrol; and garbage disposal. We note, however, that Item 12 on the same invoice covers additional work which is conceded by the applicant on its own spreadsheet to be dutiable. With respect to general/port services, Customs has held that such costs should be prorated between dutiable and nondutiable costs (See Headquarters Ruling 226729, dated June 7, 1996). Accordingly, in view of the fact that Enclosure E covers both dutiable and nondutiable costs, the costs covered by Item 11 should be prorated as well.

Item 3 on the CF 226 designated for our review covers various articles listed on a Customs Entry Summary Continuation Sheet (CF 7501-A) with the notation at the top of the sheet that it is a "GATT ENTRY." The applicant's claim for relief is apparently based on the provisions of the General Agreement on Tariffs and Trade ("GATT"), specifically 19 U.S.C.

(3) the cost of spare parts necessarily installed before the first entry into the United States, but only if duty is paid under appropriate com- modity classifications of the Harmonized Tariff Schedule of the United
States upon first entry into the United States of each spare part purchased in, or imported from, a foreign country. (Emphasis added)

With respect to Item 3, while we are in accord with the applicant's claim for relief regarding some of the items listed on the Entry Summary Continuation Sheet, relief is denied under this claim with respect to the following item nos. in view of the fact that they do not constitute "parts" within the meaning of ? 1466(h)(3): 8 (oxygen gas); 9 (acetylene gas); 10 (welding rod); 11 (copper wire); 13 (steel plate) and 16 (silicon sealant).

Item 8 on the CF 226 designated for our review covers a service listed on ABS invoice no. 7620860059 as a "MODIFICATION SURVEY." However, it is not readily apparent that this service covers only that work deemed to be a modification as discussed above and is therefore nondutiable as part of the modification costs, or also includes dutiable repair work which would render it dutiable (see Enclosure E which covers both dutiable and nondutiable work). Consequently, in the absence of evidence to the contrary, Item 8 is dutiable.

HOLDING:

The foreign costs contained within the subject entry for which our review is sought are dutiable in part under 19 U.S.C. ? 1466 as discussed in the Law and Analysis portion of this ruling.

Sincerely,

Jerry Laderberg

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