HQ 115073 - Vessel Repair Entry No. C27-0167411-4; PRESIDENT ROOSEVELT; V-136; Protest No. 2704-00-101080; Pro-rated expenses; parts and equipment; 19 U.S.C. 1466(h)(3) - United States International Trade Commision Rulings

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HQ 115073

July 11, 2000

VES-13-18 RR:IT:EC 115073 RSD

CATEGORY: CARRIER

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

RE: Vessel Repair Entry No. C27-0167411-4; PRESIDENT ROOSEVELT; V-136; Protest No. 2704-00-101080; Pro-rated expenses; parts and equipment; 19 U.S.C. 1466(h)(3)

Dear Sir:

This is in response to your memorandum dated May 23, 2000, which forwarded for our review a protest related to the above-referenced vessel repair entry. Among its claims, protestant is requesting relief from duties on items #20, #48, #111, #130, #249, # 260, #306 and #309 pursuant to 19 U.S.C. § 1466(h)(3). In addition, protestant requests relief from the duty assessed on item #6.

FACTS:

The PRESIDENT ROOSEVELT is a U.S.-flag vessel owned by American President Lines, Inc. (“APL”). After the completion of foreign shipyard work, on December 9, 1997, the vessel arrived in the United States at San Pedro, California. On December 10, 1997, a vessel repair entry was timely filed. An application for relief with supporting documentation was timely filed as well. The application for relief was followed by supplemental claims filed on March 26, 1998. On April 3, 1998, the Vessel Repair Liquidation Unit forwarded the initial request for a Headquarters review, but through inadvertence the supplemental claims of March 26, were not forwarded. The application was considered and on October 21, 1998, Customs issued Headquarters Ruling 114344, which allowed in part and denied in part the claims made in the application. However, the ruling did not address items detailed in the supplemental application.

On December 22, 1999, Customs Headquarters issued Headquarters Ruling 114584, which addressed items raised in APL’s petition for review dated December 31, 1998. We indicated that our review would be limited to those items addressed in the petition itself. The claims that were raised in the petition were denied. We also indicated that the if it wished to revisit the supplemental claim items or raise other claims, APL could present new items for our consideration in the form of a protest. On April 10, 2000, APL filed a protest challenging the pro-ration of general services and requesting the reconsideration of the disputed items #20, #48, #111, #130, #249, # 266, #306 and #309 pursuant to 19 U.S.C. § 1466(h)(3). In addition, in the protest, APL requests relief from the duty assessed on item #6.

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:

Section 466(a), Tariff Act of 1930, as amended (19 U.S.C. 1466(a)) provides, in pertinent part, that:

The equipment, or any part thereof ... 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 to engage in the foreign or coasting trade, or a vessel intended to be employed in such trade, shall, on the first arrival of such vessel in any port of the United States, be liable to entry and the payment of an ad valorem duty of 50 per centum on the cost thereof in such foreign country.

We turn now to a consideration of the items under protest.

I Pro-ration of General Services and Drydock costs

General Services. Protestant claims that all of the costs associated with this category have traditionally been held to be free of duty, and that there is nothing in the decision of the court in the case of Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484 (1993), which should change this result.

As explained in ample precedent, Customs does consider the types of expenses associated with these costs to be pro-ratable under the terms of the Court opinion in Texaco, supra. We find that the expenses of General Services should be pro-rated between dutiable and non-dutiable costs as reflected on the vessel repair entry.

Drydocking the vessel. It also is claimed that Texaco, supra., does not support the imposition of duty on such costs. It argued that the focus should be on whether the work would have been necessary but for the repairs. Protestant maintains that the mere drawing up of a vessel on a drydock is not a part of her repairs but is rather a method of making an inspection of her to determine whether any repairs are necessary.

As explained numerous times since the decision of the court in Texaco, traditional treatment of these costs by Customs was altered by that opinion. Since the overall costs while in drydock were mixed between dutiable and non-dutiable costs, the cost of drydocking will be apportioned accordingly.

Method of calculating pro-rated expenses. The protestant espouses the position that the expenses attributable to so-called GATT items (items claimed under subsection (h)(3) of the vessel repair statute) should not be included in the calculation. The claim is that the cost of (h)(3) items (those items purchased and installed abroad without first having been entered into the commerce of the United States) are properly excluded from consideration under subsection (a) of the vessel repair statute.

Customs, when determining the procedures which would govern the administration of subsection (h)(3) of the vessel repair statute, was aware that a qualifying article would be dutiable at the applicable rate of duty under the Harmonized Tariff Schedule of the United States (HTSUS) rather than at the normal 50 percent rate applicable to other vessel repair expenses under paragraph (a) of the statute. We found, however, that even though the items claimed under (h)(3) were to be recorded on a Customs Form 7501-A Continuation Sheet which would then be attached to a traditional vessel repair entry form (CF 226), those items were part of the vessel repair entry and would be considered as foreign shipyard expenses. Since the pro-ration of expenses is intended to take into account the totality of foreign repair-related expenditures, it is proper to include any (h)(3) expenses as dutiable amounts. Pro-ration should include the cost of so-called GATT items.

II Miscalculation of Duties Owed

Protestant also contends that Customs incorrectly calculated the amount of duty owed on items on which Customs ruled in Headquarters Ruling 114344 qualified for a duty exemption under 19 U.S.C, 1466 § (h)(3). According to the Protestant the amount of duty owed on items #178, #179, #206, #229, #231, and #373 should be $892.98, but Customs assessed $1989.55 of duty on these items. The vessel repair liquidator reviewed the matter and concurred that for the 6 items ruled upon in Headquarters Ruling 114344, the amount of duty owed should have been calculated at $892.98 and that other items which Customs headquarters had not yet ruled upon may have been included in the duty that Customs assessed. Accordingly, this part of the protest is granted.

III Additional Claims under 19 U.S.C. § 1466(h)(3)

Protestant also contends that there are eight additional items that qualify for a duty exemption under 19 U.S.C. 1466(h)(3). 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 commodity 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)

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 designated 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.

The term “equipment” is determined to mean something which constitutes an operating entity unto itself. Equipment retains at least the potential for portability. Equipment may be affixed to a vessel in a non-permanent fashion, such as by means of bolts or other temporary methods, which is a feature distinguishing it from being considered an integrated portion of the hull and superstructure of a vessel. Examples of equipment as defined are seen in such items as winches and generators.

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.

In the present matter, Protestant requests relief of the duty assessed on items #20, #111, #48, #130, #249, #260, #306, and #309 under 19 U.S.C. §1466(h)(3).

Item No. 20 covers the replacement of two lube oil pumps installed in the overhaul of the No. 3 turbo-charger. Item No. 48 is identical to Item No. 20 except that the oil pumps were installed to turbocharger #3 instead of the turbocharger # 2. However, we have no documentation to support the Protestant’s claim. Consequently, Item Nos. 20 and 48 will not be accorded treatment under subsection (h)(3).

Item No.111 consists of main engine exhaust thermometers. Protestant points out that the thermometers are required instrumentation for the safe and efficient operation of the main engine and that the ship’s crew installed the thermometers. We concur that the engine thermometers would constitute parts and should be accorded treatment under subsection (h)(3).

Item No. 130 concerns various spare parts used for the overhaul of the turbocharger. Enclosed invoices from the Metalock-Seeserv (Singapore) (Invoice #101153) show that these items consist of bearings, a set sealing, bush, and bearing cover gasket. The invoice also shows that no cost of transportation or any other related costs were included. Based on the description contained on the invoice, we agree that Item No 130 should be granted treatment under subsection (h)(3).

Item No. 249 concerns lighting fixtures. Protestant claims that these items are parts of fixtures, not the globes and lamps. However, no documentation was submitted to support the protestant’s contentions. Accordingly protestant’s claim with respect to this item is denied.

Item No. 260 is a distillate pump motor which protestant concedes is a piece of equipment, but it claims the electric motor is the prime mover for the distillate pump. According to the protestant, it is an integral part of the distillate pump and its only function is to drive the pump. However, there is no documentation for these claims, and thus item No. 260 will retain its status as dutiable.

Item No. 306 is a No. 2 heavy fuel oil purifier, which was serviced by the DeLaval/Alfa Laval Singapore Pte., Ltd. They supplied one intermediate service kit and one major service kit. The packing list shows items such as gaskets, O-rings, seal rings, ball bearings, lock washers, and friction pads. Upon review, we agree that these items constitute parts and should be accorded treatment under subsection (h)(3).

Item No. 309 is a distillate pump motor, which is a duplicate of Item No. 260. Again there is no documentation to support this claim and thus the item will remain dutiable.

Protestant also challenges the dutiability of Item No 6, which includes drydock survey costs of the American Bureau of Shipping (ABS). With respect to surveys or inspections, the general rule is 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. When an inspection or survey is conducted to ascertain the extent of damage sustained or whether repairs are necessary, the survey cost is dutiable as part of the repairs which are accomplished. See Headquarters Ruling 114599, dated February 26, 1999. Notwithstanding the applicant’s submission of a copy of an ABS “Rules for Building and Classing Steel Vessels 1998-1999”, the record does not contain a copy of ABS invoice number 7629860187 that was referred to in the protest. Accordingly, upon reviewing the record, we are unable to ascertain what costs were incurred pursuant to a required scheduled inspection by the ABS. Consequently, the costs covered by Item No. 6 will remain dutiable.

HOLDING:

As detailed above, the protest is granted in part and denied in part.

In accordance with § 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

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