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HQ 113835

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March 20, 1997

VES-13-18-RR:IT:EC 113835 GEV

CATEGORY: CARRIER

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

RE: Vessel Repair Entry No. 110-7992196-8; PRESIDENT KENNEDY; V-84; Parts; Materials; 19 U.S.C. ? 1466(h)(3)

Dear Sir:

This is in response to your memorandum dated January 24, 1997, forwarding a petition for review of your decision denying an application for relief from duties assessed pursuant to 19 U.S.C. ? 1466. Our findings are set forth below.

FACTS:

The PRESIDENT KENNEDY is a U.S.-flag vessel owned and operated by American President Lines, Ltd. The vessel incurred foreign expenditures in August and September of 1996. The vessel subsequently arrived in the United States at Seattle, Washington, on September 13, 1996. A vessel repair entry was timely filed.

An application for relief, dated December 5, 1996, with supporting documentation, was timely filed. By letter dated December 24, 1996, your office denied the application for relief and notified the applicant of the right to file a petition for review of this decision. A petition, dated January 16, 1997, with supporting documentation, was timely filed.

At issue is Item no. 9 on the subject vessel repair entry covering certain articles alleged to be parts installed on the vessel in conjunction with repairs to the fire damper gear box. The articles in question include cap nuts, lock nuts, nuts and bolts, as well as certain material (i.e., stainless steel) purchased by the petitioner from Hong-Yang Marine Service Machinery Co., Ltd. (Hong-Yang). With respect to the aforementioned material, Hong-Yang provided labor and equipment to fabricate it into two new threaded spindle shafts which were subsequently installed
on the vessel pursuant to the fire damper gear box repair. Included with the documentation supporting the petitioner's claim is the following: APL Service Purchase Order #015363; Hong-Yang invoice no. HY9608517; an original and amended Entry Summary Continuation Sheet (CF 7501-A); and the petitioner's comments with respect to the implementation of 19 U.S.C.

ISSUE:

Whether the articles covered by Item no. 9 in the subject entry are classifiable under 19 U.S.C. ? 1466(h)(3).

LAW AND ANALYSIS:

Title 19, United States Code, ? 1466(a), 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.

Section 1466 was amended by the reinstatement of subsections (h)(1) and (2), the wording of which remain unchanged from their previous enactment as part of the Customs and Trade Act of 1990 (? 484E of Pub.L. 101-382), which had expired by its terms on December 31, 1992. The amendment, which is effective for all vessel entries made on or after January 1, 1995, also added a new subsection (h)(3) which provides as follows:

(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.

The scope of the amendment is narrow. It is useful to bear in mind that the limiting language of (h)(3) refers only to "spare parts", whereas subsection (a) of the statute assesses duty on a broad range of costs including "equipments, or any part thereof, including boats,...or the repair parts or materials to be used, or the expenses or repairs..." (Emphasis added). It is clear that the Congress has extended a vessel repair duty limitation under subsection (h)(3) only to certain qualifying parts.

A part under ? 1466 is determined to be something which does not lose its essential character or its identity as a distinct entity but which, like materials, is incorporated into a larger whole. It would be possible to disassemble an apparatus and still be able to readily identify a part. The term part does not mean part of a vessel, which practically speaking would encompass
all elements necessary for a vessel to operate in its designed trade. Examples of parts as defined are seen in such items as piston rings and pre-formed gaskets, as opposed to gaskets which are cut at the work site from gasket material.

For purposes of ? 1466, the term materials is determined to mean something which is consumed in the course of its use, and/or loses its identity as a distinct entity when incorporated into the larger whole. Some examples of materials as defined are seen in such items as a container of paint which is applied to vessel surfaces, and sheets of steel which are incorporated into the hull and superstructure of a vessel.

Subsection (h)(3) is administered by maintaining the requirement that a vessel repair entry (Customs Form 226) must be filed upon first arrival in the United States of vessels covered by the repair statute. Since issuance of instructions by Customs Headquarters on May 31, 1995, in instances in which a vessel operator claims certain foreign parts expenditures to be within the terms of subsection (h)(3), it has been required that continuation sheets normally submitted with entries for consumption (Customs Form 7501-A) must be completed and attached to the vessel repair entry form. The continuation sheets must provide all required information necessary to assign the proper duty rate as listed in the Harmonized Tariff. The vessel repair entry number is the sole number assigned to the entry, and such an entry with continuation sheets attached is considered to be a vessel repair entry. For entries which followed the January 1, 1995, effective date of the statutory amendments, but which preceded the issuance of Headquarters guidance, the form of entry was guided by local Customs practice, and most commonly saw a vessel repair entry accompanied by an entry for consumption.

As noted above, in the present matter the petitioner claims that the articles covered by Item no. 9 of the subject entry are classifiable under the provisions of subsection 1466(h)(3). We have reviewed the supporting documentation and find that with respect to the cap nuts, lock nuts, nuts and bolts, although they are considered to be "parts" as that term is used in ? 1466, there is no indication that all of these parts were "necessarily installed" during the course of the repair in question. The only statement to that effect is that of the Vice President, Ocean Assets Management, contained in the petition, who alleges that, "All of the material supplied by Hong-Yang are spare parts required for this repair." Not only is this the statement of an individual who was not present when the repair took place, it is contradictory in view of the fact that it fails to recognize the distinction between material and parts as provided in the statute and discussed above. Consequently, the evidence presented with respect to the subject cap nuts, lock nuts, nuts and bolts does not represent the purchase of qualifying parts as required under subsection (h)(3).

In regard to the stainless steel material in question, the record indisputably reflects that as originally purchased it in fact constituted material rather than parts as defined above. Consequently, notwithstanding its subsequent fabrication by Hong-Yang into two new spindle shafts, it does not qualify as parts for purposes of subsection (h)(3).

HOLDING:

The articles covered by Item no. 9 in the subject entry are not classifiable under 19 U.S.C. ? 1466(h)(3).

Accordingly, the petition is denied.

Sincerely,

Jerry Laderberg
Acting Chief

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