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HQ 113689

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October 3, 1996

VES-13-01/18-RR:IT:EC 113689 GEV

CATEGORY: CARRIER

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

RE: Vessel Repair Entry No. C28-0200669-5; M/V STRONG VIRGINIAN; Modification; Survey; Equipment; 19 U.S.C. ? 1466

Dear Sir:

This is in response to your memorandum dated December 21, 1995, forwarding an application for relief from duties assessed pursuant to 19 U.S.C. ? 1466 with supporting documentation. You request our review of three items (nos. 3, 100, and 165 listed on the spreadsheets) contained within the above-referenced vessel repair entry. Our findings in this matter are set forth below.

FACTS:

The M/V STRONG VIRGINIAN is a U.S.-flag vessel operated by Strong Virginian Navigation Company. Subsequent to the completion of various foreign shipyard work, the vessel arrived in the United States at Oakland, California, on July 19, 1995. A vessel repair entry and an application for relief with supporting documentation were timely filed. Included in the work performed are the following items for which our review is sought:

Item No. Description

3 The cost of a crane barge and assisting tug pursuant to a test of the vessel's lifting gear.

100 Turbocharger modification.

165 Turbocharger costs.

In support of its claim that the above-listed items are nondutiable, the applicant has submitted various documentation including invoices, letters and diagrams.

ISSUES:

1. Whether the cost of the crane barge and assisting tug covered by Item 3 is dutiable under 19 U.S.C. ? 1466.

2. Whether evidence is presented sufficient to prove that the work covered by Item 100 constitutes a modification to the hull and fittings of the vessel so as to render the work nondutiable under 19 U.S.C. ? 1466.

3. Whether the turbocharger costs covered by Item 165 are dutiable under 19 U.S.C.

LAW AND ANALYSIS:

Title 19, United States Code, ? 1466, provides in part for payment of an ad valorem duty of 50 percent of the foreign 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 to vessels documented under the laws of the United States to engage in the foreign or coastwise trade, or vessels intended to engage in such trade.

Item 3 covers the cost of a floating crane barge (SEMCO L88) and an assisting tug which, pursuant to Semco Salvage & Marine PTE. LTD. invoice no. 44-3376, were necessary "...to carry out bollard pull test on vessel..." In support of its claim the applicant cites to C.S.D. 79-277 and has submitted a letter from Germanischer Lloyd (USA), Inc. (the North American representative of Germanischer Lloyd) which provides, in pertinent part, as follows:

"According to the requirements of this Society and to ILO Convention
No. 152, for lifting appliances, a quinquennial thorough examination is required five years after the initial examination and every five years thereafter."

The letter further provides that, "...the actual examination and test was [sic] carried out with satisfactory result on 20 August 1994, using water-filled barge SEMCO L88 as test weight."

In regard to the dutiability of inspection/survey costs, we note that C.S.D. 79-277 stated 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.

In regard to Item 3, the documentation submitted indicates that the charges for the crane barge and assisting tug were incurred pursuant to, and necessary for, a required periodical survey by a qualifying entity. Consequently, we find Item 3 to be nondutiable.

Item 100 covers work alleged to be a modification of a turbocharger. In regard to this claim, 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 pertaining to Item 100, we note that notwithstanding the single word "MODIFICATION" appearing on the invoice, the remainder of that document is devoid of any details or descriptions of the work that would support such a conclusion. Furthermore, the word "(OVERHAUL)" appears next to the word "MODIFICATION" on the invoice which contradicts rather than supports the latter and provides an indicia of a dutiable repair. Accordingly, in the absence of sufficient evidence to support a modification claim, Item 100 is dutiable.

Item 165 covers the transpiration and assembly of a turbocharger. The record is devoid of any evidence to indicate that this item is other than a dutiable purchase of equipment. Accordingly, Item 165 is dutiable.

HOLDINGS:

1. The cost of the crane barge and assisting tug covered by Item 3 is not dutiable under 19 U.S.C. ? 1466.

2. The evidence presented is insufficient to prove that the work covered by Item 100 constitutes a modification to the hull and fittings of the vessel so as to render the work nondutiable under 19 U.S.C. ? 1466. Accordingly, Item 100 is dutiable.

3. The turbocharger costs covered by Item 165 are dutiable under 19 U.S.C. ? 1466.

Sincerely,

Chief

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