HQ 227171 - Vessel repairs; Vessel R.J. PFEIFFER, V-93; Vessel Repair Entry # C27-0147659-3; Repairs under Warranty; Modifications; Surveys; Cleaning; 19 U.S.C. 1466(a) - United States International Trade Commision Rulings

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HQ 227171

December 9, 1997

VES-13-18-RR:IT:EC 227171 GG

CATEGORY: CARRIER

Chief, Vessel Repair Liquidation Branch
U.S. Customs Service
P.O. Box 2450
San Francisco, CA 94126

RE: Vessel repairs; Vessel R.J. PFEIFFER, V-93; Vessel Repair Entry # C27-0147659-3; Repairs under Warranty; Modifications; Surveys; Cleaning; 19 U.S.C. 1466(a)

Dear Sir:

Reference is made to your memorandum of August 6, 1996, which forwards for our consideration an application for relief from duties filed by Matson Navigation Company ("Matson").

FACTS:

The U.S. flag vessel M/V R.J. PFEIFFER underwent certain work at the Hyundai Mipo Shipyard in Ulsan, Korea, during March and April, 1996. A vessel repair entry was timely filed upon arrival in the United States. Matson filled an Application for Relief from vessel repair duties on July 25, 1996. Relief is sought on several different grounds, namely, that the work performed was under warranty or was done for an ABS survey, or involved modifications that are exempt from duty. Some of the modifications, Matson claims, have already been determined by Customs to be exempt from duty in a non-binding ruling, HQ 226780.

A factual discussion of the applicable warranty provisions, which is presented later in this ruling, is incorporated by reference into this section.

ISSUE:

Whether the work items under challenge in the Application for Relief are subject to 19 U.S.C. 1466(a) vessel repair duties?

LAW AND ANALYSIS:

Title 19, United States Code, section 1466(a), provides in part for payment of an ad valorem duty of 50 percent 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.

Certain work performed overseas is, for a variety of reasons, not considered to be a repair for duty assessment purposes. Various items have been referred to us to determine if they fall under an accepted exemption from duty. A discussion of each follows.

1. Work claimed to be covered by warranty.

It is well established that work done and equipment added pursuant to the specifications of the original contract for the construction of a U.S. flag vessel are not dutiable under 19 U.S.C. ?1466. See Sea-Land Service, Inc. v. United States, 12 CIT 287; 683 F. Supp. 1404 (1988). The question that must usually be answered is whether work performed on the vessel subsequent to documentation was necessary to comply with the original specifications of the construction contract, or alternatively was repairs within the meaning of the vessel repair statute. The following factors are considered in making such a determination: 1) the terms and nature of the guarantee or warranty clause; 2) when the work was actually performed; and 3) the nature and purpose of the work and equipment provided. Such an inquiry seeks to distinguish between a long-term service contract and a warranty of fitness for use and quality that is tied to the original construction of the vessel. Hence, Customs has adopted a one-year limit as the benchmark for honoring new construction warranties which otherwise qualify. The crucial factor is notification of the defect by the owner to the shipbuilder within that period. See Headquarters Ruling Letter 112449, dated March 31, 1993.

There are two warranties involved here. The first is a guarantee issued by the shipbuilder, National Steel and Shipbuilding Co. ("NASSCO"), as part of the original construction contract. NASSCO guaranteed work and material for a period of 180 days after delivery of the M/V R.J. PFEIFFER to Matson, provided that the new owner reported the defects to NASSCO within the guarantee period. The second type of warranty stems from deficiency lists that are part of the Certificate of Delivery and Acceptance of Ship, dated August 9, 1992. Acceptance of the ship by Matson was made subject to correction by NASSCO of the acknowledged defects on the list.

To support claims that work completed in Ulsan was covered by warranty, the petitioner has submitted a July 23, 1996, letter from NASSCO to Matson confirming that NASSCO accepted the work performed as guarantee claims within six months of ship delivery. NASSCO also provided copies of the guarantee reports ("GDR's") that brought the warranted defects to its attention.

Hyundai Mipo Invoice Item 011, Stern Tube Sealing

This work involved the repositioning and renewal of the stern seal and the modification of the stern seal piping. In support of its position that this was a known problem prior to delivery of the vessel from NASSCO to Matson, and was covered by warranty, Matson has presented the following documentation: * NASSCO letter - item 5, Stern Tube Seal Misalignment Problem.
* Guarantee reports GDR 293, dated October 5, 1992; GDR 501, dated January 1, 1993; and GDR 560, dated January 19, 1993, bringing the stern tube seal problems to the attention of the NASSCO guarantee engineer.
* Exhibit 1 to the Certificate of Delivery and Acceptance of Ship listed the stern tube forward seal leak as an outstanding deficiency item.

Based on this information, we are satisfied that the stern tube sealing repairs are part of the original construction of the vessel and accordingly, are not subject to vessel repair duty.

Invoice Item No. 099.1, Drydock Expenses for Stern Tube Modifications

This invoice item is for the expense of eight drydock days attributed to the stern tube seal warranty repairs. The petitioner argues that the total $22,133.00 drydock cost is non-dutiable because it reflects the time that was required to accomplish modifications which are exempt from vessel repair duty. Where dutiable and non-dutiable work is performed while a vessel is in drydock, Customs' policy is to apportion the drydock expenses between the items which are remissable and those which are subject to duty. See HRL's 226729, dated June 7, 1996, and 227063, dated October 31, 1996. Accordingly, in determining how much of the current drydock charge is dutiable, Customs will take into account the total drydock charges incurred on this particular vessel repair entry and make a calculation based on the percentage of all repairs that are ultimately deemed to be dutiable.

Invoice Item No. 019, Chloropac Installation

Installation of new chloropac unit piping in connection with replacement of defective, original-equipment, Blume chloropac system.
Supporting documentation:
* Elcat installation Dwg. 0-73909-0
* NASSCO letter - item 2, Salt Water Strainer Anode System * GDR 383, dated November 8, 1992

This repair item was covered by warranty and is not subject to vessel repair duty.

Invoice Item No. 021, High/Low Temperature Cooling Modifications

Piping and valves installed to correct balance between high and low temperature fresh water cooling systems. Supporting documentation:
* NASSCO letter, item 3, High/Low Temperature Cooling Modifications
* GDR's 478, dated January 19, 1993, and 536 (unsigned by NASSCO), dated December 21, 1992.

This work is covered by warranty and is exempt from vessel repair duty.

Invoice Item No. 025, Exhaust Gas Expansion Joint Failure

Main engine exhaust expansion joint replaced with new joint supplied by NASSCO.
Supporting documentation:
* NASSCO letter - item 6, Exhaust Gas Expansion Joint Failure
* Certificate of Delivery and Acceptance of Ship, Exhibit 1, Schedule 1-A, page 2 of 6, item BT0221CU, acknowledging exhaust system misalignment problem at time of ship's delivery to Matson.

This work is covered by warranty and is exempt from vessel repair duty.

Invoice Item No. 026, Exhaust Gas Accumulator Feet Repair

Repair of exhaust gas accumulator mounts damaged during sea trials. The underlying cause of the damage was determined to be due to a warrantable condition.
Supporting documentation:
* NASSCO letter - item 1, Exhaust Gas Accumulator Feet Repair
* GDR 620, dated January 20, 1993

This work is covered by warranty and is exempt from vessel repair duty.

Invoice Item No. 029, Lube Oil Pumps

Vibration of main engine lube oil pumps recognized during initial sea trials. Pump foundations strengthened with additional steel plate.
Supporting documentation:
* NASSCO letter, item 4, Main Lube Oil Pump Foundation Changes
* GDR 223, dated November 9, 1992
* Delivery Documents, Exhibit 1, Schedule 1-B, page 1 of 2, item BT0503CU, evidencing NASSCO acceptance of vibration issue at time of delivery of ship to Matson.

This work is covered by warranty and is not subject to vessel repair duty.

2. Work not claimed to be under warranty

Invoice Item No. 012, Hull Cleaning

The invoice description of this work is "clean hull using high pressure water blast to enable inspection of underwater surfaces by ABS/USCG". Customs has long held that the cost of cleaning is not dutiable unless it is performed as part of, in preparation for, or in conjunction with dutiable repairs or is an integral part of the overall maintenance of the vessel. See Headquarters Ruling Letter ("HRL") 113585, dated June 6, 1996. We note that the next item on the invoice, No. 013, is for the sandblasting and painting of the exterior hull. Because of the presence of these dutiable repairs in item No. 013 which may be related to the cleaning in controversy, and because of the absence of evidence which could possibly clarify the matter, we conclude that the cost of the hull cleaning is dutiable.

Invoice Item No. 043, Propeller Polishing

Propeller polishing associated with a periodic ABS survey is non-dutiable. See HRL's 112066, dated January 18, 1994; 112775, dated June 22, 1993; and 113122, dated March 20, 1996.

Invoice Item No. 024, Ballast Tank Inspection

The petitioner states that the salt water ballast tanks and cofferdams were opened and cleaned for examination by ABS as part of the Special Periodical Survey. The shipyard invoice also notes that upon closing the tanks gaskets "damaged by inspection" were replaced. Opening and closing water tanks is a non-dutiable operation when it relates to a required ABS survey. HRL 112378, dated November 30, 1992. Further, articles necessarily destroyed in the course of opening an area for inspection may be replaced without duty consequence if no other dutiable repair accompanies the operation. See HRL 113046, dated June 6, 1996. Consequently, the costs associated with this invoice item are exempt from vessel repair duty.

Invoice Item No. 020, Generator Fuel Pipe

The invoice description of the work performed is to "make new permanent piping modification to operate generators individually on diesel fuel". As a general rule, modifications to the hull and fittings of a vessel are not dutiable under the vessel repair statute. Qualifying modifications to the hull and fittings of a vessel involve a permanent incorporation into the hull or superstructure of a vessel, provide an improvement or enhancement in operation or efficiency of the vessel, and may not involve the replacement of a current part, fitting, or structure which is not in good working order. See HRL 113585, supra; and 112851, dated March 22, 1996.
The petitioner explains that this work was necessary because there was no means of cleaning any one particular generator engine fuel system for maintenance purposes. Further, this was a new and permanent piping installation to enhance generator engine maintenance. The installation of the generator fuel pipe is a modification and is not dutiable.

Invoice Item No. 028, Fuel Level Probes

The petitioner explains that the existing tank fuel level indicating system on the M/V R.J. PFEIFFER is not fully trustworthy. For reasons of safety and pollution control, it was decided to install a permanent redundant system for measuring liquid in the top of the tanks. The invoice indicates that the shipyard put in "new fuel tank level indicating system probes" to effect this change. Since this is a replacement of a defective system that is performing a similar function, this item is dutiable as a repair.

Invoice Item No. 030, Fuel Oil Piping

The steam supply for heating this vessel's fuel oil was inadequate due to piping restrictions. As a result, only high grade fuels could be burned, creating high operating costs. The shipyard installed larger piping and valves to correct this problem. This work, which is permanent and improves the vessel's efficiency, is a modification which is not subject to duty.

Invoice Item No. 031, Installation of New Bitt

A new tie up bitt was added to the vessel's transom to facilitate the safe handling of the vessel by tug boats. This new and permanent installation enhances the vessel's operation and constitutes a modification. Therefore, its costs are not subject to duty.

Invoice Item No. 033, Air Isolation Valve

According to the petitioner, the installation of a control air isolation valve was necessary to provide maintenance access to the compressed air system supplying the vessel's fire dampers. This work, which is permanent and improves the ship's operation, qualifies as a non-dutiable modification.

Invoice Item No.'s 037 and 038, Engine Valve and Turbocharger Sealing

These items were installed at the recommendation of the main engine manufacturer to promote enhanced service life for various parts of the main engine. They are new and permanent installations to the fittings of the vessel and will result in improved vessel operation. This work qualifies as a duty-exempt modification.

Invoice Item 040, Range Anchor Chains

The anchors and chains were ranged and cleaned for ABS inspection. Although the cleaning and ranging of anchor chain for inspection by ABS is usually non-dutiable, in this case these operations were followed by a dutiable repair, namely, the painting of anchor chain shots. The painting is listed as Invoice Item 040.1. As noted earlier, the cost of cleaning is not dutiable unless it is performed as part of, in preparation for, or in conjunction with dutiable repairs or is an integral part of the overall maintenance of the vessel. HRL 113585, supra. In the absence of clear evidence to the contrary, we conclude that the cleaning of the chains was preparatory to the subsequent painting operation. Since the cost of the cleaning was not segregated from the ranging function, the entire amount listed under invoice item 040 is dutiable.

Invoice Item 042, Vent Fan Removals

The vent fans in question were removed to accommodate the cargo hold remodeling discussed in the last paragraph of this ruling. The dutiability of this work is contingent upon what Customs' final determination will be in that matter. The removal of an existing, operational system for the purpose of improving the efficient performance of the vessel is not dutiable provided that the work was not performed in conjunction with dutiable repairs. See HRL's 111307, dated February 4, 1991, and 109971, dated June 12, 1989. Thus, this item will be exempt from duty if the cargo hold reconfiguration described in HRL 226780 is ultimately found to be a modification.

Invoice Item 047, Piping Installation

This work involved the welding of a new piece of piping to allow condensate to return to the shore boiler. This qualifies as a non-dutiable modification.

Invoice Item 048, Generator Exhaust Pipe

The shipyard installed new thermometers and pressure gauge bosses on each generator engine exhaust to better monitor the operation of the vessel's three generator engines. Absent satisfactory evidence showing that this was not simply a replacement of defective equipment, we find this to be a dutiable purchase.

3. Review of Hatch Cover Changes

You requested that we review Invoice No. 10151 (sic), on which the charges for hatch cover changes are presented. This work refers to the reconfiguration of the M/V R.J. PFEIFFER's cargo holds as discussed in HRL 226780. In that advisory ruling, Customs determined that converting existing cargo holds to accommodate 20 and 40-foot, instead of 24-foot, containers, would constitute a modification upon presentation of satisfactory evidence that the work had been completed as described. The ruling contemplated that the work would involve "replacing the existing 24-foot hatch covers and coamings with 40-foot ones." It also noted Matson's claim that the current hatch covers were in good condition and in no need of repair. The invoice gives us pause because it implies that new hatch covers were installed for 24-foot as well as 40-foot container stowage. This raises the issue of whether some of this work did in fact involve the replacement of 24-foot hatches which were in need of repair. Duty-free treatment is accorded only when permanent additions enhance the operating efficiency of the vessel and replace a structure that was in good working order. See HRL's 112779, dated July 26, 1993, and 111224, dated February 19, 1991. Matson must first clarify this discrepancy between the invoice and the factual scenario in the ruling before the entire cost of the hatch work is declared exempt from vessel repair duty. If some repair work did take place, then those costs must be segregated from the costs of the non-dutiable modifications.

Sincerely,

Jerry Laderberg
Chief

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