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HQ 115312

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April 16, 2001

VES-13-18:RR:IT:EC 115312 LLO
CATEGORY: CARRIER

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

RE: Vessel Repair; Application for Relief; TONSINA V-13; Vessel Repair Entry No.C31-0005052-6; 19 U.S.C. §1466; 19 C.F.R. §4.14

Dear Sir:

We received your memorandum dated February 15, 2001, requesting we review an application relating to the TONSINA V-13, regarding the dutiability of various items. Our ruling on this matter is set forth below.

FACTS:

The TONSINA, a United States- flag vessel operated by Western Overseas Corporation, Inc. of Tacoma, Washington arrived at the port of Valdez, Alaska on October 2, 2000. The date of entry was October 2, 2000.

An application for relief, which includes the allowance of one extension, was timely filed on February 2, 2001. According to the vessel repair entry and other documents in the file, the vessel underwent repairs in Ulsan, Korea.

The operator agents, Western Overseas Corporation, Inc. submitted an application for relief identifying certain items as non-dutiable. The following items are reviewed in this ruling:

-the installation of an ozone generator, item #193 (F/O #2) -the removal and reinstallation of mooring lines, item #193 (F/O #82) -the installation of ozone purge air valves, item #193 (F/O #111) -the installation of forward Capac system, item #216 -the cost of an ABS modification survey
-The $80,000.00 bonus to Hyundai for expedited services, item #227

ISSUE:

Whether the cost of foreign shipyard work completed aboard the subject vessel is dutiable pursuant to 19 U.S.C. §1466.

LAW AND ANALYSIS:

Title 19 of the United States Code, §1466 (19 U.S.C. §1466), provides in pertinent part for the payment of an ad valorem duty of 50 percent of the cost of “equipments, or any part thereof, including boats purchased for, or the repair parts or materials to be used, or expenses of repairs made in a foreign country upon a vessel documented under the laws of the United States”

On March 3, 1995, the Assistant Commissioner, Office of Regulations and Rulings, issued a memorandum that was published in the Customs Bulletin on April 5, 1995 (Customs Bulletin and Decisions vol. 29, no. 14 at pg. 24). It provided that all vessel repair entries filed with Customs on or after the date of Texaco Marine Service, Inc. v. United States, 44 F.3d 1539 (1994), were to be liquidated in accordance with the full weight and effect of the court decision. Texaco holds that the costs of post repair cleaning and protective coverings incurred pursuant to dutiable repairs, are dutiable and indeterminate foreign expenses contained within such entries are subject to the “but for” test.

Western Overseas Corporation noted in the materials submitted, that four of the items in question were modifications/first time installations, and therefore free of duty. The arguments outlined in footnote six note the reasons for duty free treatment the applicant wants accorded the ozone generator, ozone purge air valves, forward Capac system and mooring lines.

In considering whether an operation has resulted in modification, which is not subject to duty, the following elements must be considered:

-whether there is a permanent incorporation into the hull or superstructure of a vessel

-whether the item under consideration would remain aboard a vessel during an extended lay up

-whether, if not a first time installation, an item under consideration replaces a current part, fitting or structure that is not in good working order

-whether an item under consideration provides an improvement or enhancement in operation or efficiency of the vessel

Another factor used to determine whether a particular replacement operation is a modification as opposed to a repair is to analyze the condition of the structure(s) prior to its replacement. Customs has determined that even though an operation might, under normal circumstances, be considered a permanent duty-free modification, the benefit of such a finding is not extended to operations which encompass the replacement of an existing structure(s) that is in need of repair. If a permanent addition is a first time installation, or if it replaces an existing structure that is in good working order at the time of its replacement and an enhancement in operating efficiency is provided, the operation may be considered a duty free modification. (HQ 112779)

The field orders regarding the installation of the ozone generator, ozone purge air valves and forward Capac system all indicate that these items were being installed for the first time on the subject vessel and that they were not pre-existing systems/parts; they will presumably enhance the operating efficiency of the vessel, and do not seem to be portable parts according to the description of repairs noted in the field orders submitted, making these items duty free modifications.

The removal and replacement of the mooring lines, constitutes a cost in support of a modification. Statement 28 of the Chief Engineer indicates that the mooring wires that were removed, were in satisfactory operating condition, transferred to spools and placed in storage, pending ultimate further disposition. According to the field order regarding this item, the lines were removed in preparation for the installation of the ozone generator system and then, after the installation of this new system, were replaced. For these reasons, this item is also duty free.

In C.S.D. 79-277, the Customs Service addressed the dutiability of surveys/inspections stating that “if 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. 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. However, C.S.D. 79-277 does not exempt from duty repair work done by a shipyard in preparation for a required survey. 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. Therefore, the costs of a required scheduled inspection by a qualifying entity are exempt. (HQ 112779)

The modification survey submitted indicates that seven modifications were surveyed and all but one, (the electronic throttle control) were deemed duty free. Although the majority of the items on the modification survey were non-dutiable, the survey costs associated with the inspection of the electronic throttle control, which is dutiable, makes the survey dutiable. C.I.E. 429/61

The last item that Western Overseas Corporation indicates as non-dutiable, is the $80, 000.00 bonus paid to Hyundai for expedited installation of the ozone generator system to the subject vessel. Western Overseas Corporation and Hyundai Mipo Dockyard apparently agreed that if Hyundai would incur the additional labor costs for the installation of the ozone generator system to enable the vessel to depart before a certain date, the owners would pay Hyundai a bonus of $80,000.00. Since the ozone generator system is a duty free modification, as mentioned earlier, the bonus paid to Hyundai for expedited installation of this modification is also duty free.

HOLDING:

Following a thorough review of the facts in this case as well as an analysis of the law and applicable precedents that bear upon those facts, we have determined that the application for relief should be granted in part and denied in part for the reasons set forth in the Law and Analysis section of this ruling.

Sincerely,

Larry L. Burton
Chief
Entry Procedures and Carriers Branch

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