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HQ 116217

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October 5, 2004

VES-13-18-RR:IT:EC 116217 GOB

CATEGORY: CARRIER

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

RE: 19 U.S.C. 1466; Vessel Repair Entry C16-0017371-5; M/V LYKES DISCOVERER; Protest No. 1601-03-100445

Dear Sir:

This is in response to your memorandum of April 20, 2004, forwarding for our review certain items on the protest filed on behalf of Marine Transport Corporation (“protestant”) with respect to Vessel Repair Entry C16-0017371-5. Our ruling follows.

FACTS:

The M/V LYKES DISCOVERER (the “vessel”), a U.S.-flag vessel owned by the protestant, incurred foreign shipyard costs. After completion of the work in question, the vessel arrived in Charleston, South Carolina on September 2, 1999. A vessel repair entry was timely filed.

By letter of April 9, 2003, your office denied the application for relief. By submission received on August 13, 2003, the subject protest and application for further review was filed.

ISSUE:

Whether the costs for which the protestant seeks relief are dutiable under 19 U.S.C. §1466.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466 (19 U.S.C. § 1466) provides for the payment of duty at a rate of fifty percent ad valorem 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.

In SL Service, Inc. v. United States, opinion 03-1174 decided February 4, 2004, rev’g 244 F. Supp. 1359 (Ct. Int’l Trade 2002), the Court of Appeals for the Federal Circuit upheld CBP’s proration of certain expenses. The court stated in pertinent part as follows:

. . . apportionment is consistent with section 1466(a) and the “but for” test. In the context of dual-purpose expenses, it is rational to impose the duty on only that portion of the expense that is fairly attributable to the dutiable repairs. Indeed, to impose the 50% ad valorem duty on the entire costs of dry-docking in this case would exceed the mandate of the statute. The logical appeal of apportionment has been recognized in other areas of the law . . . . . .
Customs’ long-standing practice of apportioning the cost of various expenses between dutiable repairs and non-dutiable inspections and modifications comports with both the statute and common sense.

In its application of the vessel repair statute, CBP has held that modifications, alterations, or additions to the hull of a vessel are not subject to vessel repair duties. The identification of work constituting modifications vis-a-vis work constituting repairs has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a nondutiable modification, the following factors have been considered. These factors 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 nondutiable under 19 U.S.C. 1466:

1. Whether there is a permanent incorporation into the hull or superstructure of a vessel, either in a structural sense or as demonstrated by means of attachment so as to be indicative of a permanent incorporation. See United States v. Admiral Oriental Line, 18 C.C.P.A. 137 (1930). However, we note that a permanent incorporation or attachment does not necessarily involve a modification; it may involve a dutiable repair or dutiable equipment.

Whether in all likelihood an item would remain aboard a vessel during an extended lay-up.

3. Whether an item constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function.

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

Our determinations follow with respect to the items for which you have requested our review. We will respond in the order the items are listed in your memorandum.

The general services items which you have prorated have been appropriately prorated.

Item 108, hand cleaning, involves “Sea chests, pipes in sea chests, bow thruster tunnel, discharge pipes, etc. to be thoroughly cleaned by scraping and painted . . . ” [Emphasis added.] We find that this cost is dutiable as repair and/or maintenance.

Item 172, duplex strainer bypass, involves the provision and installation of a 100 mm duplex, 30 micron strainer in place of a simplex strainer and the necessary piping modifications to accommodate the new strainer. We find this cost is dutiable as the new strainer is dutiable as vessel equipment. There is no segregation of costs with respect to a possible modification.

Item 417 involves transportation costs, which should be prorated between dutiable and nondutiable costs.

Item 423 involves the installation of new reinforcement brackets at the hatch coamings. The protestant has not established that this item involves a modification to the vessel, as opposed to dutiable repair or equipment. We find that this item is dutiable.

Item 426 involves staging, which should be prorated between dutiable and nondutiable costs.

Item 449 involves the insertion of two plates (one to cargo hold, one to E.R. bulkhead) and one bracket (to E.R. bulkhead) as well as “three angle stiffeners at E.R. bulkhead to be veed out and rewelded.” This item involves repair and/or maintenance and is therefore dutiable.

Item 482 involves “Remote Shut Down for Fuel Oil Pump . . . Inboard Sludge Transfer . . . Supply and installation of remote shut down stops port and starb. side fuel manifold main deck fot [sic] the operation of sludge . . . “ The protestant states that “[t]his item is a new capability added to the sludge transfer pump to allow for a remote shutdown that was not previously possible . . . .” We find that this item is a nondutiable modification.

Item 196 is for “Miscellaneous Cleaning M.E. . . . Open and clean the following areas: 1) Scavenging Air Space 2) Underside of Pistons Space 3) Crankcase 4) Bilge Tank[.] All carbon and oily residue to be removed. . . .” The cleaning of air scavenger spaces has been discussed and ruled upon many times by CBP. For example, in HQ 112280, dated February 3, 1993, this issue was discussed in great detail. We determined that “[t]he removal of carbon and oil deposits from the main engine scavenger spaces is a maintenance operation the cost of which is subject to duty under 19 U.S.C. 1466.” Accordingly, we find that this item is dutiable.

Item 199 is for “reversing Cylinders M.E. . . . Remove (1) reversing cylinders from engine and dray to shop for repairs. Disassemble for cleaning and inspection. Measure all components for manufacture tolerances. Repair or renew necessary parts to make as original.” [Emphasis added.] We find that this item is a dutiable repair and/or maintenance.

HOLDING:

As discussed in the Law and Analysis section of this ruling, certain costs are dutiable under 19 U.S.C. 1466, certain costs are nondutiable, and certain costs should be prorated. Accordingly, you are instructed to allow the protest in part and deny the protest in part.

In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), 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 of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Glen E. Vereb
Chief

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