VES-13-18 CO:R:P:C 110953 JBW

Chief, Technical Branch
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831

RE: Vessel Repairs; Modifications; Remission; United States Parts; Rebate; ALASKA I; 19 U.S.C. 1466; 19 C.F.R. 4.14.

Dear Sir:

This letter is in response to your transmittal of March 26, 1990, forwarded for our review and ruling regarding the application for relief involving the above referenced case.

FACTS:

The record reflects that the subject vessel, the ALASKA I, arrived at Dutch Harbor, Alaska, on December 30, 1989. Vessel repair entry number H24-0007838-0, Customs Form 226, was filed on January 2, 1990, indicating work performed on the ship in Ishinomaki City, Japan.

On February 26, 1990, the Fishing Company of Alaska, Inc., by counsel, timely filed an application for relief. The application states that the vessel was originally manufactured as a tuna purse seiner for tropical water fishing. In 1985, the vessel was converted into a stern trawl vessel in a United States shipyard, and, in 1987, it had further work done in Japan to improve its operating efficiency. Headquarters Ruling Letter 109510, dated June 15, 1988.

In December of 1989, the ALASKA I underwent further conversions to enable the vessel to be used in the Bering Sea. Further changes were made to protect the vessel from damages resulting from heavy weather. Yamanishi Shipyard performed these conversions. The applicant claims the work performed on the vessel is not dutiable, for such work constitutes modifications, not repairs.

While in Japan, the vessel's chief engineer and a technician from Fraser Boiler and Diesel, Inc., both United States residents, overhauled the main engine. The parts used were purchased in the United States and were carried on the vessel from the United States. The parts were declared on Customs Form 4455, which was filed upon the vessels departure from the United States.

Finally, the vessel owner received a rebate for certain parts and equipment used in undisputed dutiable repairs for old parts and equipment that were returned to the manufacturer. Counsel contends that the amount of these rebates should be reduced from the value of the parts used in the repairs in order to determine the costs of these parts for duty purposes.

ISSUE:

Whether the work performed in a foreign country on the subject vessel is dutiable under 19 U.S.C. 1466 (1988).

LAW AND ANALYSIS:

I. Alterations and Modifications to the Vessel

Title 19, United States Code, section 1466, provides for payment of duty in the amount of 50 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 engage in such trade.

The Customs Service, in its interpretation of 19 U.S.C. 1466 and in accord with the logic established in United States v. Admiral Oriental Line, 18 C.C.P.A. 137 (1930), distinguishes between equipment and repairs on the one hand and permanent additions to the hull and fittings on the other. The court in Admiral Oriental cited with approval an opinion of the Attorney General (27 Op. Atty. Gen. 288) that defined the scope of the term equipment in examining a statute that permitted drawback on vessels built in the United States for foreign account, wholly or in part of duty-paid materials. The Attorney General found that items that are not equipment are:

those appliances which are permanently attached to the vessel, and which would remain on board were the vessel to be laid up for a long period...[and] are material[s] used in the construction of the vessel....

Admiral Oriental, 18 C.C.P.A. at 140 (quoting the opinion of the Attorney General).

For purposes of section 1466, dutiable equipment has been defined as:

portable articles necessary or appropriate for the navigation, operation, 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, 26 Treas. Dec. 183, 184 (1914)(quoted with approval in Admiral Oriental).

Customs has held that for an item to be characterized as a nondutiable modification, it must encompass the installation of an item as a new design feature, not as a replacement for, or restoration of, parts now performing a similar function. We have also held that the decision in each case as to whether an installation constitutes a nondutiable addition to the hull and fittings of the vessel depends to a great extent on the detail and accuracy of the drawings and invoice descriptions of the actual work performed. Even if an article is considered to be part of the hull and fittings of a vessel, the repair of that article, or the replacement of a worn part of the hull and fittings, is subject to vessel repair duties.

In the present case, we find that the invoice descriptions of the work performed to the hull, factory area, crew quarters, and other areas of the vessel in conjunction with the claims in the application for relief provide sufficient proof that no repairs were made to the items claimed as modifications. Moreover, under long-standing Customs interpretations, charges relating to drydocking and staging are not dutiable. E.g., Headquarters Ruling Letter 109510, dated June 15, 1988.

II. Overhaul in Japan of Main Engine by United States Citizens

The applicant claims that the overhaul of the main engine performed in Japan by the vessel's chief engineer and a United States technician from Fraser Boiler and Diesel who used parts purchased in the United States are not dutiable under 19 U.S.C. 1466(d)(2)(1988). This section provides for remission, conditioned on the furnishing of good and sufficient evidence, for:

such equipments or parts thereof or repair parts or materials, were manufactured or produced in the United States, and the labor necessary to install such equipments or to make such repairs was performed by residents of the United States, or by members of the regular crew of such vessel.

The applicant quotes from the memorandum published in the Customs Bulletin on May 10, 1989, in which we sought to clarify the interpretation of the Customs Service of this section. In this memorandum, we stated:

When United States-made parts/materials are placed aboard or installed either abroad or on the high seas, they must have been purchased in the United States by owner, in addition to being installed by U.S. residents or regular crew labor,in order to be free of duty under 1466.

23 Cust. B. & Dec., No. 19, 15, 16 (May 10, 1989). The applicant omits from his quotation the above underlined portion of our statement. This omission, however, distorts the emphasis placed by the statute and by our interpretation of the statute on the fact that the equipments or parts must be manufactured or produced in the United States. In contrast, parts or equipment, whether of United States or foreign origin, may be installed free of duty by members of the regular crew working alone. 19 U.S.C. 1466(a).

The work of the United States technician, who was not a member of the regular crew, requires that the overhaul be analyzed under 19 U.S.C. 1466(d)(2). The applicant submits evidence that the parts used in the overhaul were purchased in the United States. However, the applicant submits no evidence to demonstrate that these parts were manufactured or produced in the United States. Absent such evidence, the costs for the overhaul of the engine are dutiable in full, with the exception of any labor costs attributable to work performed by the chief engineer. To meet the evidentiary requirement, the owner or master must submit written documentation or other physical evidence, such as an affidavit by the equipment manufacturer, that the equipment was manufactured in the United States. See Headquarters Ruling Letter 106515, dated April 4, 1984.

The Customs and Trade Act of 1990, 484E(2), Pub. L. No. 101-382 (to be codified at 19 U.S.C. 1466(h)(2)), amended the vessel repair statute to except from duty spare repair parts or materials that have entered the United States duty-paid and are used aboard a cargo vessel engaged in foreign or coasting trade. The Customs Service interprets the use of the term cargo to limit the exception contained in the amendment to vessels whose sole service is the transportation of cargo and which are actually engaged in that service while documented for the foreign or coasting trade. The ALASKA I is a fishing and processing vessel. The sole service of the vessel is not the transportation of cargo. Consequently, the ALASKA I is ineligible for the exemption from duty accorded to parts used in repairs that have entered the United States duty-paid.

III. Rebates for Exchanged Parts and Equipment

Finally, new parts carried by the vessel from the United States were used in the repairs performed to the vessel other than the modifications and engine overhaul. The old parts replaced in the repairs were exchanged, and a rebate for the value of the old parts was credited against the cost of the new parts. The applicant did not submit the complete invoices from NC Machinery Co. for the parts purchased and the credits received. From the pages received, "exchange core" was noted on the original invoices (nos. 299326, 300295, 300296) dated in October, 1989. At the time of these transactions, NC Machinery granted no credit or rebate. It was not until February, 1990, that NC Machinery (invoice no. 382596) actually granted the rebate for the returns, and counsel's letter notes that the total amount of the rebate is still in dispute.

The applicant acknowledges that the cost of these parts is dutiable. The applicant claims, however, that the cost of the parts used in the repairs should be reduced by the amount of the rebate in order to determine the dutiable cost of those parts. The statute assesses duty for foreign repairs based on the costs of such repairs. 19 U.S.C. 1466(a). Liability for the entry and payment of duties accrues at the time of first arrival of the vessel in any port of the United States. 19 U.S.C. 1466(a); 19 C.F.R. 4.14(a)(1). The statute and the regulations thus do not contemplate adjustments to the costs made subsequent to the entry of the vessel. Cf. 19 C.F.R. 152.103(a)(4)(1990) (Customs regulation disallowing rebates made after date of importation when determining transaction value for the importation of merchandise).

The effect of the rebate was to reduce the cost incurred by the owner for the foreign repairs. The final rebate adjustment to the cost of the parts, however, was not fixed until after December 30, 1989, the date liability for entry and duty accrued. The dutiable cost of the parts is therefore the originally invoiced price, and the cost should not be reduced by the amount of the rebate.

HOLDING:

The work performed in Japan to modify the vessel as described in the application is not dutiable under 19 U.S.C. 1466. Absent good and sufficient evidence to show that the parts used were manufactured and produced in the United States, the costs of the overhaul of the main engine reduced, by any labor costs attributable to work performed by the chief engineer, are dutiable. Finally, the cost of the parts purchased in the United States and used in the dutiable repairs should not be reduced by the amount of the rebate in order to determine the dutiable cost of those parts.


Sincerely,

B. James Fritz
Chief
Carrier Rulings Branch