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HQ 115611

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April 10, 2002

VES-13-18 RR:IT:EC 115611 RSD

CATEGORY: CARRIER

United States Customs Service
ATTN: Vessel Repair Unit
New York/Newark Area
1210 Corbin Street
3rd Floor
Elizabeth, New Jersey 07201

RE: Vessel Repair Petition; Modifications, fuel oil piping; 19 U.S.C. 1466; AMERICA, V-16A; Vessel repair entry number 458-0049251-9

Dear Sir:

This letter is in response to your memorandum dated February 6, 2002, which forwards a petition for review from American Ship Management, LLC. (ASM) filed in conjunction with the above referenced vessel repair entry for our review. Our findings are set forth below.

FACTS:

The Merchant Vessel MV AMERICA is a U.S.-Flag container vessel trading primarily between the East and Gulf coasts of the United States and Europe. Upon return from the subject voyage a vessel repair entry was timely filed. An application for remission of duty was timely filed, which was granted in part and denied in part.

The subject vessel is equipped with one Sulzer RTA84C main engine (for propulsion) and three Dithatsu Model 6 DLB-28 auxiliary engines for power. Both of these types of engines were originally designed to run on heavy fuel oil, a slightly refined crude and waste oil derivative.

Some time after taking over the operation and management of these vessels, ASM determined that these Daihatsu auxiliary engines were unreliable. This unreliability could result in interrupting the ship’s operation and putting refrigerated cargoes and the safety of the ship at risk because these engines are heavily relied upon during the voyage and in maneuvering, etc. After investigation, ASM attributed this problem to the fact that these engines operate on heavy fuel oil. Research was done to look at the option of running the engines on marine diesel oil, a lighter distillate fuel product.

However, because the diesel oil storage tank capacity aboard was limited to 131.78 tons and was inadequate for a transpacific crossing and reserve capacity running auxiliary generators, there was a problem with the proposal to change the engines. The situation was surveyed and a determination was made to modify the piping to the #5 Fuel Oil Tank (Port Side) which would be converted to a diesel oil tank.

On November 2 and 3 in 2000, partial modification conversion work was carried out at the Van Brink Shipyard. The shipyard subsequently issued an invoice. On the invoice the shipyard originally provided, it used the word “repair” several times in the description of the work done on the engine fuel piping. The petitioner submitted a corrected invoice from the shipyard with an explanation. A letter from the Van Brink Shipyard stated that the wording “repair” and “repairs” mentioned in item 1 was used by mistake and should have been written as “modification” and “modifications” because the complete job done was in fact a modification.

The invoice from Van Brink shipyard indicates that the vessel was attended to because of a modification of the fuel transfer pipe in cargo hold no. 6. The fuel transfer pipe work was carried out as follows:

“Existing pipe diameter 6” cut through on two locations by means of an air driven saw.

At one side of the still existing pipe section in situ a flange fitted and welded and blanked off with a bolted flanged.

At the opposite side the still existing pipe in situ provided with fitted and welded flanges, and afterwards a reducer piece 6”-3” fitted.

On the reducer piece a 3” pipe with various pipe bends fitted and welded running through the bulkhead of hold 6/7.

At a distance of 150 mm from the bulkhead in hold no. 7 the new 3 pipe provided with a fitted and welded flange and blanked off with a bolted flange.

Most of the above used materials from ship’s supply. Work was partly carried out in evening and night overtime hours incl. transport dues, chemist attendance, materials and excess cost for overtime hours.”

ISSUE:

Whether the cost of the foreign shipyard work completed abroad on the MV/ AMERICA is dutiable pursuant to 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 equipments, 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.

In its application of the vessel repair statute, Customs has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. The identification of work constituting modifications vis-à-vis work constituting repairs has evolved from judicial and administrative precedent. (See Otte v. United States, 7 Ct. Cust. Appls. 166, T.D. 36489 (1916); United States v. Admiral Oriental Line et al., 18 C.C.P.A. 137, T.D. 44359 (1930); and Customs Bulletin and Decisions, Vol. 31, Number 40, published October 1, 1997.) The factors discussed within the aforementioned authority are not by themselves necessarily determinative, nor are they the only factors that may be relevant in a given case. However, in a given case, these factors may be illustrative, illuminating, or relevant with respect to the issue of whether certain work may be a modification of a vessel which is non-dutiable under 19 U.S.C. § 1466. In considering whether an operation has resulted in a modification that is not subject to duty, the following elements may be considered.

1. Whether there is a permanent incorporation into the hull or superstructure of a vessel (See United States v. Admiral Oriental Line et al., T.D. 44359 (1930)), either in a structural sense or as demonstrated by the means of attachment so as to be indicative of the intent to be permanently incorporated. This element should not be given undue weight in view of the fact that vessel components must be welded or otherwise "permanently attached" to the ship as a consequence of constant pitching and rolling. In addition, some items, the cost of which are clearly dutiable, interact with other vessel components resulting in the need, possibly for that purpose alone, for a fixed and stable juxtaposition of vessel parts. It follows that a "permanent attachment" takes place that does not necessarily involve a modification to the hull and fittings.

2. Whether in all likelihood, an item under consideration would remain aboard a vessel during an extended lay up.

3. Whether, if not a first time installation, an item under consideration replaces a current part, fitting or structure which is not in good working order.

4. Whether an item under consideration provides an improvement or enhancement in operation or efficiency of the vessel.

The only item on which American Ship Management is seeking relief from duty relates to the work done to the vessel’s fuel tank piping system. Upon reviewing the materials submitted with the petition including the revised invoice, we find that the work done on the fuel oil piping constitutes a non-dutiable modification. We note that the work done to the vessel’s fuel oil piping constituted a permanent improvement to the vessel, which was not done in conjunction with a repair or to fix any broken system or component, as the previous fuel piping system was in good working order. In addition, the work was completed as an improvement in the operation to the efficiency and reliability of the vessel. Therefore, the work was non-dutiable modification of the vessel not a repair.

HOLDING:

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

Sincerely,

Larry L. Burton

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