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HQ 116332





February 9, 2005

VES-13-18-RR:IT:EC 116332 CK

CATEGORY: CARRIER

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

RE: M/V STRONG VIRGINIAN; Protest and AFR Number 2002-04-100030; Vessel Repair Entry Number NC3-2003021-5; 19 U.S.C. 1466(a) and (h)(2); spare parts; repairs; modifications

Dear Sir:

This is in response to your memorandum of September 30, 2004, forwarding for our review the above-numbered protest filed by Givens and Johnston, PLLC on behalf of Ommeren Shipping, USA, PLLC. Our ruling follows.

FACTS:

The M/V STRONG VIRGINIAN arrived in Corpus Christi, Texas on February 23, 2003 from Durban, South Africa thereby completing its second voyage of 2002. An entry was timely filed and an application for relief from duty was filed May 22, 2003. The application was granted in part and denied in part by the New Orleans Vessel Repair Unit (VRU) by letter dated October 3, 2003, and the entry was liquidated. The subject protest was filed on December 29, 2003.

The subjects of the protest are items on two invoices (claiming relief under 19 U.S.C. 1466(h)(2) and alleged modification), and one request for proration of an overtime charge.

ISSUE:

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

LAW AND ANALYSIS:

Title 19, United States Code, §1466(a) (19 U.S.C. §1466(a)) states in pertinent part:

“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.”

Title 19, United States Code, §1466(h)(2) (19 U.S.C. §1466(h)(2)), provides, in pertinent part, that the duty imposed by subsection (a) of this section shall not apply to

“the cost of spare repair parts or materials (other than nets or netting) which the owner or master of the vessel certifies are intended for use aboard a cargo vessel, documented under the laws of the United States and engaged in the foreign or coasting trade, for installation or use on such vessel, as needed, in the United States, at sea, or in a foreign country, 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”

In order to implement proper enforcement of §(h)(2), it is necessary that the key terms be defined. In defining parts, materials, and equipment, it is most beneficial to do so in descriptive terms rather than in the form of specific lists of items which fit the categories. In compiling lists it is inevitable that items will be inadvertently omitted which may lead to improper or inconsistent application of the law.

A part 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.

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 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.

The first item at issue is a “PCB Power Supply” from Mackay Communications, on an U.S. invoice (Exhibit 7). In addition to the invoice, protestant has also submitted an affidavit from the Technical Director for Van Ommeren who has personal knowledge of the items used on the M/V STRONG VIRGINIAN in the last voyage. The affidavit states that the “PC Board” is “a distinct entity which has been incorporated into a larger whole (the satellite communications system). It is not an operating entity unto itself.” We agree that the “PC Board” is a part that is entitled to relief.

The second item at issue is whether the “replacement of the damaged lagging sections on HFO Transfer Main in the pipe tunnel” is a dutiable repair or part of a nondutiable modification of the pipes and tanks from diesel fuel to heavy fuel.

In its application of the vessel repair statute, CBP 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.

In considering whether an operation has resulted in a modification that is not subject to duty, the following elements may be considered.

Whether there is a permanent incorporation into the hull or superstructure of a vessel (See United States v. Admiral Oriental Line et al., supra, 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 result of constant pitching and rolling. In addition, some items, the costs 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.

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 that is not in good working order.

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

Exhibit 9a in the subject protest consists of 5 pages of work and supplies used in the conversion of tanks from diesel oil to heavy oil. The work performed on the tanks and connecting pipes meets the four criteria discussed above. However, the one line item at issue (Item 3.11 of Exhibit 9a) states “Replace damaged lagging sections on HFO Transfer Main (869.02) in the Pipe Tunnel.” This does not fall within the criteria listed above. Based on the description of the work the sections were damaged and replaced, rather than improved or enhanced, as required in criterion 3 above. This line item on invoice 9a, therefore, constitutes a repair as the record is devoid of any evidence that this damage resulted in the process of any modification work.

The final item at issue is whether the overtime costs listed on exhibit 9, which contains both dutiable repair work and nondutiable modification work should be prorated.

In regard to these costs, it appears from the vessel repair entry and invoice under consideration that they were incurred in conjunction with both dutiable and nondutiable work. These charges are therefore to be prorated pursuant to our position set forth in HQ 113977, supra. Regarding this CBP position, the CAFC in SL Service, Inc. v. United States, 357 F.3d 1858 (Fed. Cir. February 4, 2004), cert. denied, __U.S. __ (2004) recently upheld CBP’s proration of “dual-purpose expenses.”

HOLDING:

Following a thorough review of the evidence as well as well as an analysis of the law and applicable precedents, we have determined that the protest should be allowed in part and denied in part, as specified in the Law and Analysis portion of this ruling.

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

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