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HQ 113723





October 22, 1996

VES-13-18-RR:IT:EC 113723 GOB

CATEGORY: CARRIER

Port Director of Customs
Attn.: Vessel Repair Liquidation Unit, Room 415 P.O. Box 2450
San Francisco, CA 94126

RE: M/V PRESIDENT KENNEDY, V-78; 19 U.S.C. 1466; Request for advance ruling; Paint of foreign manufacture supplied under warranty

Dear Sir or Madam:

This is in response to your facsimile memorandum dated October 17, 1996, which forwarded the request for advance ruling of October 17, 1996 submitted by American President Lines, Ltd. (the "requester").

FACTS:

The requester states as follows:

The above subject vessel on Voyage 078 Entry No. 110-6461867-8 was drydocked, and the underwater body was painted in January 1996 at the Hyundai MIPO Dockyard in Korea. The paint was supplied by APL, purchased from the International Paint Company USA. It was manufactured in Houston, TX.

Immediately after the vessel was returned to service, the coating system failed in the form of a catastrophic classic case of "cold flow." In depth investigation of this failure has determined that the entire U/W system must be removed by grit blasting and that a new system must be applied.

The cause of this failure is in dispute between the paint manufacturer and the applicator, the shipyard. The shipyard maintains that the USA paint is at fault which in part is substantiated since subsequent drydockings using Korean manufactured paint has [sic] not failed.

The International Paint Company has agreed to supply replacement paint to APL under warranty at no cost to APL, however, Hyundai insists that the replacement paint be of Korean manufacture. The warranty job is scheduled for February 1997 at Hyundai MIPO.

We, therefore, hereby request an advance ruling that the replacement paint supplied under warranty by International Paint Company of Korean manufacture will be duty-free under 19 USC 1466.

ISSUE:

Whether the cost of the replacement paint of Korean manufacture is dutiable pursuant to 19 U.S.C. 1466.

LAW AND ANALYSIS:

19 U.S.C. 1466 provides for the payment of duty at a rate of fifty percent ad valorem on the cost of foreign repairs to vessels documented under the laws of the
United States to engage in foreign or coastwise trade, or vessels intended to be employed in such trade.

We have ruled on the subject issue previously.

In Ruling 112009 dated January 13, 1992, we stated:

The vessel was also painted under warranty by Mitsubishi Heavy Industries, Ltd. (MHI) with locally manufactured paint supplied by International Paint Company from local stocks. Because Sea-Land was not charged for this work, it seeks remission of the duty related to this repair (item 15 and 16).
...
...in Sea-Land Service, Inc. v. United States, 83 F. Supp. 1404 (1988), the Court addressed whether repair work performed on a newly constructed vessel subsequent to its delivery to the owner might be considered to be part of the new construction contract. Simply put, the court considered whether "completion of construction" is a viable concept so as to render the duty provisions of 19 U.S.C. 1466(a) inapplicable if proven. The Court found completion of new construction to be a valid concept, subject to specific conditions, which are:

1. "All work done and equipment added [must be] pursuant to the original specifications of the contract for the construction of the vessel ...."

2. "This basic standard is limited to work and equipment provided within a reasonable period of time after delivery of the vessel."

Absent evidence indicating that the warranty repairs are considered to be part of a new construction contract, work done under a warranty agreement is considered a repair under the vessel repair statute and the cost thereof is dutiable. (See C.S.D. 81-50). Because the record clearly indicates that the paint was manufactured in Japan and had not been previously imported into the United States with applicable duty paid, the cost of the paint is also dutiable.

In Ruling 112532 dated March 14, 1995, we stated:

With respect to item 28, the applicant asks for relief with respect to the cost of paint which it claims was supplied "at no cost under guarantee by 'CMP' and China Shipbuilding Corporation." We find that the cost of the paint is dutiable. We note initially that the applicant has not provided any documentation in support of its claim that the paint was supplied to it at no cost. We note additionally that it has been Customs' position that warranty work falls within the scope of dutiability pursuant to 19 U.S.C. 1466 unless such work falls within the scope of Sea-Land Service, Inc. v. United States, 683 F.Supp. 1404 (C.I.T. 1988), which recognized the validity of warranties issued in the context of new vessel construction.

In C.S.D. 81-50, which was cited in Ruling 112009, we stated:

Counsel states that the warranty items are not dutiable because they were completed at no charge to the vessel owner. In a decision dated June 9, 1976, Customs held that repairs covered by a service agreement contract are dutiable under 19 U.S.C. 1466 even though the vessel owner was not charged for the repairs.

C.I.E. 542/62 held repairs to a radar unit dutiable even though the repairs were effected under a repair contract and the costs were not borne by the vessel owner.

The above rulings make clear that it is our position that the replacement paint of Korean manufacture is dutiable under 19 U.S.C. 1466.

HOLDING:

The replacement paint of Korean manufacture is dutiable under 19 U.S.C. 1466.

Please provide the requester with a copy of this ruling.

Sincerely,

Chief,
Entry and Carrier Rulings Branch

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