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HQ 116426

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March 23, 2006

VES-3-18-RR:BSTC:CCI 116426 GOB

CATEGORY: CARRIER

Chief, Vessel Repair Unit
U.S. Customs and Border Protection
P.O. Box 1389
Kenner, LA 70063

RE: 19 U.S.C. 1466; Vessel Repair Entry C53-0035048-1; Protest 5301-04-100261; M/V AMERICAN MERLIN, V-1

Dear Sir:

This is in response to your memorandum of March 8, 2005, forwarding for our review the protest filed on behalf of Merlin Shipholding Corporation (“protestant”) with respect to Vessel Repair Entry C53-0035048-1. We met with the representatives of the protestant on May 24, 2005. The protestant made two additional submissions dated August 12, 2005, and a further submission dated March 7, 2006. Our ruling follows.

FACTS:

The M/V AMERICAN MERLIN (the “vessel”) is a U.S.-flag vessel owned and/or operated by the protestant. It incurred foreign shipyard costs in the course of its voyage. The vessel arrived in the port of Houston on August 13, 2000. A vessel repair entry was timely filed. Your office denied the application for relief on May 1, 2003. The petition for relief was denied by HQ 116037, dated October 3, 2003. In addition to the claims set forth in the protest and the protestant’s additional submissions, we have carefully considered the claims put forth by the protestant at a conference held on May 24, 2005.

Any item numbers used in this ruling reflect the numbers used by the protestant on the spreadsheets (summary spreadsheet and entry summary continuation sheet) which accompanied its March 7, 2006 submission. In its summary spreadsheet (March 7, 2006 submission), the protestant has indicated with respect to each item, its claimed basis for relief. Where the protestant has stated “NONE,” such indication means the protestant is not requesting relief from the vessel repair duty with respect to that item.

ISSUE:

Whether the costs for which the protestant seeks relief are subject to duty under 19 U.S.C. § 1466?

LAW AND ANALYSIS:

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.

Protestant’s Proration Claim

In SL Service, Inc. v. United States, 357 F.3d 1358 (Fed. Cir. 2004), rev’g 244 F. Supp. 1359 (Ct. Int’l Trade 2002), cert. denied December 13, 2004, the Court of Appeals for the Federal Circuit upheld CBP’s proration of certain shipyard 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.

The protestant claims that certain items should be prorated, i.e., certain costs within items 69, 128, 144, 175, and 176 on the summary spreadsheet. We concur.

We further find that the following additional costs within items 69 and 128, which the protestant claims are nondutiable, should be prorated between dutiable and nondutiable costs: item 69 – haulage and towage/tugs; and item 128 – tugs and wharfage. Finally, within item 144, the cost for tugs and wharfage should be prorated between dutiable and nondutiable costs.

Protestant’s Modification Claim

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.

Via the summary spreadsheet, the protestant claims that items 76 and 156 involve nondutiable modifications. The invoice for item 76 includes repairs. The invoice for item 156 reflects that work was performed on the boiler. The protestant has not established by satisfactory documentary evidence that this work constitutes a nondutiable modification. Accordingly, we find that these costs are dutiable.

Protestant’s Casualty Claim

Title 19, United States Code, section 1466(d)(1) (19 U.S.C. § 1466(d)(1)) provides in part that the Secretary is authorized to remit or refund such duties if the owner or master of the vessel furnishes good and sufficient evidence that the vessel was compelled by stress of weather or other casualty to put into a foreign port and make repairs to secure the safety and seaworthiness of the vessel to enable her to reach her port of destination. Section 4.14(h)(2)(i), Customs and Border Protection (“CBP”) Regulations (19 CFR § 4.14(h)(2)(i)) provides that "port of destination" means such port in the United States.

Section 1466(d)(1) and 19 CFR § 4.14(h)(2)(i) essentially set forth a three-part test, each of the elements of which must be established by good and sufficient evidence to qualify for remission:

1. a casualty occurrence;
2. an unsafe and unseaworthy condition; and 3. the inability to reach the port of destination in the U.S. without foreign repair.

19 CFR § 4.14(h)(2)(i) provides in pertinent part as follows:

. . . For the purposes of this paragraph, a “casualty” does not include any purchase or repair made necessary by ordinary wear and tear, but does include the failure of a part to function if it is proven that the specific part was repaired, serviced, or replaced in the United States immediately before the start of the voyage in question, and then failed within six months of that date.

In T.D. 71-83 (38), Customs (now CBP) stated as follows:

If satisfactory evidence is furnished clearly showing any part of a vessel to have been repaired and/or serviced just prior to the commencement of a voyage from a United States port, it is reasonable to assume that the part is seaworthy for a round voyage, foreign and return. Unless evidence indicates some other reason necessitated the repairs during the voyage, failure of that part to function within six months after the repair and/or servicing in the United States may be considered a casualty within the meaning of [19 U.S.C. 1466(d)]. However, remission of duty under that statute in the circumstances is limited to duty on the essential, minimum foreign repairs to the parts. . . [All emphasis added.]

The protestant states in pertinent part as follows:

. . . the repairs done abroad to the port main engine fall squarely within the “One Round Voyage” rule and qualify for remission under 19 C.F.R. 4.14(h)(2)(i). The specific part that was separated and serviced in the U.S. and which experienced the catastrophic explosion and was repaired abroad is the crankshaft assembly. As documented herein, the owners of the MERLIN employed Premier Engine (an authorized Pielstick, the manufacturer, engine repair facility) to inspect, repair and service the entire crankcase and crankshaft assembly and all parts associated with it in Houston, Texas immediately before the commencement of the Voyage 1, during which the ship experienced the catastrophic explosion in the port main engine. Before commencing the voyage, the service representatives conducted a complete crankcase inspection, checking all connecting rods for proper fit on the crank pins, also checking for any sign of damage or wear, and proper lube oil flow from the underside of each piston. No unusual conditions were found. Any deficiencies found were corrected. Inspections were also made by the American Bureau of Shipping (“ABS”) and the vessel was determined to be seaworthy . . . . These inspections were completed only 15 days before the catastrophic explosion.

The protestant has submitted numerous documents in support of its claims.

The statement of a consultant engineer (a “Certified Pielstick Engine Service Engineer”),who was involved in the domestic repairs, provides in pertinent part as follows:

In the course of these inspections, repairs and service we obtained access to the crankshaft and its bearings as well as other bearings and parts connected to the crankshaft. Our inspections involved all parts connected to the crankshaft, including all connecting rods and the bearings connecting them to the crankshaft. . . .
The inspections undertaken by me and my assistants, together with the ship’s crew, constituted a thorough-going repair, inspection and servicing of the port main engine’s crankshaft and connecting rods. Any deficient bearings were replaced and those inspected and found not deficient were confirmed to be in good operating order. . . .
Connecting rods for this type of engine are designed to have a[n] indefinite lifespan. These components do not experience normal wear and tear which would result in the catastrophic failure described in the Osprey Ship Management submission. Failure of components in this design-category is always due to one or several extraordinary events, and emergency repair is usually the only alternative to towing the vessel.

Considering the complete thorough inspection of the crankshaft, connecting rods and engine block conducted by me and my assistants, it is my opinion that the failure experienced on the port main engine cannot be contributed [sic] to normal wear and tear.

The statement of the vessel’s chief engineer describes the work performed in the United States prior to the subject voyage as follows:

On 22 February 2000 Pielstick representatives from Premier Engines took crankshaft deflections on the Port Main Engine. At this time they also performed a complete crankcase inspection on that engine along with [the] Port Engineer . . . . This inspection included checking all connecting rods for proper fit on the crank pins, any sign of damage or wear, and proper lube oil flow from the underside of each piston. No unusual conditions were noted.

In the same statement, the chief engineer describes part of the subject foreign voyage as follows:

On the morning of the 10th of March, at 0520 hours, the watch engineer and OMU had just returned to the control room after making rounds of the engine room. All conditions seemed normal. They were at the log desk in the control room when they heard a loud noise. There had been no alarms, or warning. The OMU went into the engine room to investigate, and the watch engineer went to check the control console and gauges. The OMU reported that the inspection covers were off the port main engine, with smoke and sparks in the engine room. The watch engineer shut down both main engines, notified the bridge, and called me. When I arrived in the engine room minutes later, the port main engine lube oil pump, port main engine rocker arm lube oil pump, port main engine fuel pump and valves, port main engine jacket water and injector cooling pumps and isolation valves had been secured. At this point there was no threat of fire, and no one had sustained any personal injuries. Upon investigation the port main engine crankcase door from cylinder #11 was found on the deck, along with part of a connecting rod. The #11 piston connecting rod had broken, resulting in damage to #11 piston and liner, #2 piston and liner, the crankcase doors at cylinders #2 and #11 and the surrounding areas of the crankcase. I notified the bridge and Captain of the situation, and verified the condition of the starboard main engine. Preparations were then made and by 0708 hours the starboard main engine was restarted.

An American Bureau of Shipping (“ABS”) report dated April 5, 2000 described the following conditions to be repaired or renewed: piston no. 2 broken at lower part; piston no. 11 broken at lower part and heavily scored; liners no. 2 and 11 broken; connecting rod no 11 broken at its lower part, and upper and lower bearing shells damaged; no. 2 connecting rod bearing shell scored; crankpin no. 2 worn down to a maximum of 8 mm in way of no. 11 connecting rod bearing, and crankshaft bent up to 0.5 mm maximum between the main bearing nos. 2 and 3; connecting rod bearing shell nos. 1, 3, 10, and 12 variously whipped and scored; main bearing shell nos. 2 and 3 variously scored; and main engine “A” frame distorted on starboard side and broken on port side, above the inspection doors in way of no. 11 connecting rod. The ABS report also recommended the following work: remaining parts and systems of the port main engine to be opened up, examined, repaired and/or renewed as necessary; removals necessary to effect repairs to be placed as they originally were; crankcase and sump tank to be cleaned, oil pipes to be flushed with clean oil and sump tank to be filled with new oil; and upon completion of repairs the port main engine to be tested during dock and/or sea trials.

An Interim Survey Report of the Salvage Association dated June 7, 2000, appears to be generally consistent with the other documentation submitted.

The documentation submitted by the protestant also includes an ABS Damage/Repair Survey dated June 8, 2000 and a report dated June 29, 2000 by the consulting engineers.

After careful consideration, we find that the protestant has provided good and sufficient evidence in support of its claim under 19 U.S.C. § 1466(d)(1). Therefore, that claim is granted with respect to the costs for which that claim has been asserted.

Protestant’s Claim re Credits

At the conference on May 24, 2005, the protestant provided a “summary of spreadsheet errors,” in which it claims that certain credits (three) should be applied and that one invoice was “applied twice.” Your office has reviewed these claims and we have arrived at the following determinations in conjunction with your office. The first item listed (contained within item 128) was applied by your office as an expense. Your office will eliminate this expense of repairs, i.e., duty will not be assessed against the sum of this claimed credit. However, we find that the protestant has not provided satisfactory documentary evidence to establish that the sum on this “credit” sheet, as well as the sum on the next two claimed credit sheets (a sheet after item 134 and a sheet within item 136) should be credited, or deducted, from the expenses of repairs. Accordingly, this credit claim is denied. The fourth item, in the amount of FRF55,280.50 (Macor Neptun invoice no. 2005314, p. 2), listed on the summary of spreadsheet errors indicates that duty was applied twice against a certain cost. Your office advises that duty was in fact applied twice because duplicate documents were submitted for this cost. Accordingly, your office will eliminate the duplicative duty.

Protestant’s Claim with respect to 19 U.S.C. § 1466 (h)(3)

Title 19, United States Code, section 1466(h)(3) provides as follows:

The duty imposed by subsection (a) of this section shall not apply to- . . .
(3) 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 Schedules 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 consultation with your office, we find that the items listed on the Entry Summary Continuation Sheet qualify for treatment under 19 U.S.C. § 1466(h)(3) except for the following items, as numbered on the Entry Summary Continuation Sheet: 14, 22, 32, 43, 44, 45, 49, 66, 161, 163, 165, 168, 169, 173, 175, 176, 177, 190, and 194. Numerous of the items for which the protestant has claimed treatment under 19 U.S.C. § 1466(h)(3) are within the scope of the protestant’s casualty claim.

We have addressed the items your office has asked us to address. Any remaining items relating to the subject protest will be addressed by your office.

HOLDING:

The costs for which the protestant seeks relief are nondutiable or remissible in part and dutiable in part under 19 U.S.C. § 1466 as discussed in the Law and Analysis section of this ruling.

With respect to the items addressed in this ruling, you are instructed to grant 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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