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HQ 116038

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October 26, 2004

VES-13-18:RR:IT:EC 116038 TLS

CATEGORY: CARRIER

Chief, Vessel Repair Unit
U.S. Customs and Border Protection
423 Canal Street, Room 303
New Orleans, Louisiana 70130

RE: Vessel Repair Entry No. C53-0035052-3; LYKES MOTIVATOR; 19 U.S.C. § 1466.

Dear Sir:

This is in response to your memorandum of August 13, 2003, forwarding a petition for review, submitted by Marine Transport Corporation (“Marine Transport”) on behalf of the owners of the vessel LYKES MOTIVATOR, of a decision of your office assessing vessel repair duties pursuant to 19 U.S.C. § 1466. You specifically seek our advice with respect to the merits of the petitioner’s claims. Our determination is set forth in this ruling.

FACTS:

Lykes Lines Limited, LLC owns the vessel LYKES MOTIVATOR. The vessel arrived in Houston, Texas on January 18, 2001, from Antwerp, Belgium and timely filed a vessel repair entry. While in Belgium, the vessel underwent shipyard work. On April 10, 2001, Marine Transport filed an application for relief of the vessel repair duties assessed on the costs covered in the aforementioned entry. On June 20, 2002, your office issued a decision on the application, granting it in part and denying it in part.

In response to the partial denial of the application for relief, Marine Transport first requested an extension to file a petition for review, which your office granted on July 17, 2002. Marine Transport then filed a petition for review on August 20, 2002. As noted above, your office referred the petition to this office for our review. We note that the your office agrees with the petitioner on some of the work items in question. Our review is therefore limited to those work items for which you expressed no opinion and are alleged by the petitioner to constitute modifications and costs that are otherwise non-dutiable.

ISSUE:

Whether the work in question for which the petitioner seeks relief constitutes modifications to the subject vessel or expenses unrelated to vessel repairs and is therefore non-dutiable under 19 U.S.C. § 1466.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466(a) (19 U.S.C. §1466(a)), 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 the expenses of repairs made in a foreign country upon a vessel documented under the laws of the United States"

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 which 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.

The United States Court of Appeals for the Federal Circuit has ruled that expenses that would not have been incurred “but for” the dutiable repair work done are themselves dutiable, and, conversely, expenses that would not have been incurred but for the non-dutiable work done are themselves non-dutiable. Texaco Marine Services, Inc. v. United States, 44 F.3d 1539 (Fed. Cir. 1994). The same court recently ruled that the U.S. Customs and Border Protection’s (CBP’s) method of prorating duties based on the ratio of dutiable work versus non-dutiable work in regard to dual-purpose expenses is consistent with the “but for” test and section 1466(a). SL Service, Inc. v. United States, Slip Op. 03-1174 (Fed. Cir 2004), panel reh’g and reh’g en banc denied, 2004 U.S. App. LEXIS 10322 (April 19, 2004).

Considering each cost for which relief is sought, we first look at Item 0-02-007 g at Tab number 2, which is described as “706 tons of Fresh Potable Water [that] was supplied to the ship in the shipyard.” The petitioner contends that this item should be duty-free because it was utilized for human consumption and hygiene. The supporting documentation does not distinguish the use of this item with respect to dutiable repairs or non-dutiable work. Therefore, the cost for this item should be prorated as an expense of drydocking in accordance with SL Service, Inc. v. United States, supra.

Item 0-06-001 at Tab number 3 is described as “[translating and copying] ship drawings as requested by Class Society and USCG [United States Coast Guard] for their files.” The petitioner contends that the expense for these drawings would not have been incurred but for the modifications done to the vessel which necessitated new drawings. The petitioner fails, however, to indicate when such modifications were done, whether they are the subject of this review, or if so which particular items are being referred to in this instance. We have consistently held that the burden is upon the requesting party to specify the basis for the relief sought. The petitioner’s submission does not make this clear. Consequently, no relief should be granted for this cost.

Item 3-66-001 at Tab number 4 is described as “eight docking plugs in way of the ballast tanks [which] were removed to allow water to drain.” While the petitioner contends that this service was performed in conjunction with a survey and is therefore non-dutiable, our review of the invoice and other supporting documentation does not clearly reveal such. While the invoice indicates that the service was performed during drydocking, both repairs and non-dutiable work were performed on the vessel during its time in dry dock. Consequently, the cost for this item should be prorated.

Item 7-01-S03 at Tab number 5 is described as “a credit for work not accomplished.” The original invoice has an entry under this Item that states “[r]ebate: 1,800m2 area left unpainted,” and indicates a credit in the cost columns. This Item is entitled “Upper Deck Scaling and Coating” on the original invoice. We find this to be sufficient evidence of a credit given to the vessel for a service not rendered.

Item 3-61-02 and Item 3-61-03 at Tab number 8

 These Items are listed on the petitioner’s spreadsheet at Tab number 1, page 9 as “3-61-002” and “3-61-003” respectively. are described as “propeller [removed] from the shaft to facilitate the Magnetic Particle Inspection (MPI) of the tailshaft taper as required for Class and USCG survey,” and “Propeller Shaft [prepared] for withdrawal inboard for class survey,” respectively. While the original invoice indicates that these services were performed for an inspection, consistent with the petitioner’s contention, it also indicates that the work done in these instances would, without regard to any inspection, be considered dutiable repairs. Therefore, the costs for these Items are dutiable.

Item 9-01-S01 and Item 9-01-S02 at Tab number 9 are described as “crankshaft deflection [taken] for Class survey credit,” and “main engine piston number 5 [opened], piston removed and reassembled for class survey,” respectively. Only part of Item 9-01-S02, indicated at a cost of $6,135.00, is in dispute in this case. The original invoice indicates that these services were performed for an inspection. The original invoice, however, also indicates that the work done in these instances would, without regard to any inspection, be considered dutiable repairs. Furthermore, the petitioner’s assertion that some of the work was performed by a U.S. citizen is not supported by the submitted documentation. Therefore, the costs for these Items are dutiable.

Item 1-09-S03 at Tab number 10 is described as “credits and negotiated price reductions [that] were not reflected in the U.S. Customs spreadsheet.” The petitioner claims that it failed to indicate the credit on the original spreadsheet submitted to CBP. The credit is now indicated on the revised spreadsheet at Tab number 1. The original invoice indicates a credit as “Rebates: -$2.00/m.” There is also a more general reference to a rebate on the last page of the invoice that reads “3% special rebate (on 2nd payment).” The petitioner gives as a rationale for relief on this cost the following: “The credits and cost reductions have been incorporated on the revised spreadsheet in Tab 1.” The invoice notations and the petitioner’s given rationale do not provide us with enough information to associate the subject rebate with any particular work. Thus, the cost for this Item is dutiable.

Item 5-82-S01 and Item 6-05-001 at Tab number 11 are described collectively as “the existing galley on the ship [modified] to provide cafateria [sic] style seating.” The petitioner contends that the work in these instances was done to “[provide] for family style (reserved) service in the crew and officers mess. The union contracts for the American crew require cafateria [sic] style service.” In considering whether an operation has resulted in a modification, we must consider, among other matters, the following elements: 1) whether there is a permanent incorporation into the hull or superstructure of the vessel; 2) 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 or structure that is not in good working order; and 4) whether the work under consideration provides an improvement or enhancement in operation or efficiency of the vessel. Applying these considerations to the subject work, we find that the work does result in permanent incorporation into the superstructure of the vessel. The articles installed are of the type that would remain on board during an extended lay-up. The petitioner claims that the galley as configured before the work was in good working order; we see nothing in the invoice or associated documentation that would refute this claim. The work, which is claimed to have been done to meet union standards, does enhance the operation of the galley and does permanently improve its structure. We note that the fact that a change or addition of equipment is made to conform with a new design scheme, or for the purpose of complying with certain regulatory requirements or code, is not a relevant consideration for purposes of determining whether certain work constitutes a modification. In this case, however, since the work otherwise meets the standards to be considered a modification, the costs are non-dutiable.

Item 1-12-004 at Tab number 12 is described as “modified existing deck stowage arrangement by removing container stowage boxes and lashing trays.” The original invoice further describes the work done in this instance as “cropped and scrapped existing container twist lock boxes... cropped and scrapped existing tray... [and] cropped off existing pipe....” This work does not fit the description of repair work, as the work done here merely removes articles from the vessel without replacing them with anything. The petitioner claims that this work removed redundant equipment which enhanced the efficiency of the vessel. We find in this instance that the work meets the standards for consideration as a modification and/or is otherwise non-dutiable.

Item 1-17-S03 at Tab number 13 is described as “longitudinal cleats on the Hatch Coaming in way of hatches 3 thru [sic] 7 were removed.” The original invoice further describes this work as “[modified] hatch cleating system by cropping off and scrapping quick acting cleats... [modified] existing hatch cleating system by cropping off and scrapping existing bolt resting plates of quick acting cleat... [and modified] existing hatch cleating system by cropping off and scrapping existing bolts for quick acting cleat....” The petitioner claims that the work was done to “improve the operational efficiency of the ship by speeding up hatch cover un-cleating time...” Just as with the previous Item, the work done here removes articles from the vessel without replacing them with anything. We find that the work done in this instance meets the standards for consideration as a modification and/or is otherwise non-dutiable.

Item Fuji Trading Invoice FTS/00-18156 at Tab number 14 is described as “computers and related devices [installed] to facilitate communications maintenance and repair.” The petitioner claims the installation of these articles constitutes a modification. For the purposes of section 1466, dutiable equipment has been defined as “portable articles necessary or appropriate for the navigation, operations, or maintenance of a vessel, but not permanently incorporated in or permanently attached to its hull or propelling machinery, and not constituting consumable supplies.” T.D. 34150 (1914); Customs Ruling 109908, supra. The articles described here constitute equipment which are merely listed on the invoice. Aside from the petitioner’s claim, the record does not support a modification claim. Therefore, the cost for this Item is dutiable.

Item Radio Holland Invoice 219405 and Credit Note 219433 at Tab number 15 are described as “existing GMDSS station was replaced with a unit compliant with the requirements of the U.S. Federal Communications Commission,” and “credit for cancelled work [not] incorporated in the U.S. Customs spreadsheet,” respectively. The original invoice notes that in addition to removing the old GMDSS station and replacing it with a new one, repair work was done to the “STR 2000 MF/HF.” The petitioner claims that the old GMDSS was in working order. Neither the petitioner’s description of the work nor the original invoice distinguishes which labor costs and which materials costs were associated with the GMDSS work as opposed to the repair work. Consequently, the costs associated with Radio Holland Invoice 219405 should be dutiable. The credit associated with Credit Note 219433 should be allowed, however, as it is directly attributed to work done to install the new GMDSS station.

The next costs under consideration are “Items subject to section 1466(h)(3),” as described at Tab number 16. The articles at issue here are listed on several Entry Summary forms (Customs Form 7501) submitted by Marine Transport on August 22 and 29, 2002. The petitioner has also submitted corresponding invoices for the various articles from various vendors. Section 1466(h)(3) states that vessel repair duties will not be applied to 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 such spare part purchased in, or imported from, a foreign country. The petitioner acknowledges in its July 30, 2003 letter to CBP that these articles were not included in the first entry as required under section 1466(h)(3). In addition, they were not reflected on a CF 7501A as is required for relief under section 1466(h)(3). Consequently, the costs associated with the subject articles are dutiable at the rate prescribed in section 1466(a).

Item number 6-11-002 at Tab number 17 is described as “a video tape record of the new hull markings to permit a UWILD survey.” The petitioner also states that the markings were permanent and were made to comply with “Class and USCG operational requirements.” The work is further described on the original invoice as “video recording on external hull bottom.” We find that the work described here is unrelated to the type of work generally considered a dutiable repair. Thus, the cost for this Item is non-dutiable.

HOLDING:

Following a thorough analysis of the facts as well as of the law and applicable precedents, we have determined that the petition for relief with respect to the
items considered above should be denied and granted in part as specified in the Law and Analysis portion of this ruling.

Sincerely,

Glen E. Vereb
Chief

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