VES-13-18-CO:R:IT:C 110980 BEW
Chief, Technical Branch
Pacific Region
1 World Trade Center
Long Beach, California 90831
RE: Tacoma Vessel Repair Entry No. 906-1514163-8 dated
December 3, 1989, M.S. WESTWARD VENTURE. Application;
casualty; modifications; vessel repairs performed in Canada;
owner-supplied parts; Technical and Miscellaneous Revenue
Act of 1988 (P.L. 100-647); Customs and Trade Act of 1990
(Pub. L. 101-382); 19 U.S.C. 1466; 19 CFR 4.14
Dear Sir:
FACTS:
The record shows that the shipyard work in question was
performed on the subject vessel in Victoria, B.C., during the
period of November 22, through December 3, 1989. The subject
vessel arrived in the United States at the port of Tacoma,
Washington, on December 3, 1989.
The entire vessel repair entry involves a potential duty of
$229,279.95.
The applicant claims that relief for the subject items
should be granted because the items should be classified as
nondutiable items covered under title 19, United States Code,
section 1466 and section 4.14 of the Customs Regulations.
You have requested our advice concerning the following
repairs which relate to modifications/alterations/additions.
Item Nos. Description
00001-0034 rudder bearings
00001-0043 soot blowing system
00001-0058 deck drain
00001-0067 reefer cable deck
00001-0069 rotary air compressor
00001-0071 rudder bearings
00004-0001 boiler tubes
00005-0001 life raft
00005-0003-0015 misc. items
00006-0001 sleeve
00008-0001 generator tubes
00010-0001 & 0002 bearings
00011-0001 Henz Service-material
00012-0001 Chemical Cerami - tech
00013-0001 paint
00014-0001 paint
00015-0001 paint
00016-0001 paint
00018-0001 labor
The applicant claims that all of the above items are
modifications/alterations/additions to the hull and fittings of
the vessel.
ISSUES:
1. Whether certain work performed in a foreign country
constitutes modifications/alterations/additions to the
hull and fittings rather than equipment purchases or
repairs within the meaning of 19 U.S.C. 1466?
2. Whether sufficient evidence is presented to establish
that the subject repairs were necessitated by a
"casualty" which is remissible under the vessel repair
statute (19 U.S.C. 1466).
3. Whether sufficient evidence is presented to establish
that parts used in the repair of the Engine Cylinder
Liner are owner-supplied spare parts which are free
under the vessel repair statute (19 U.S.C. 1466(h)).
LAW AND ANALYSIS:
Title 19, United States Code, section 1466(a), provides in
pertinent part 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 the foreign or
coastwise trade, or vessels intended to be employed in such
trade.
Paragraph (1), subsection (d) of section 1466 provides that
duty may also be remitted if good and sufficient evidence is
furnished establishing that the vessel was compelled by stress of
weather or other casualty to put into a foreign port to make
repairs to secure the safety and seaworthiness of the vessel to
enable her to reach her port of destination.
The statute thus sets a three-part test which must be met in
order to qualify for remission under the subsection, these being:
1. The establishment of a casualty occurrence.
2. The establishment of unsafe and unseaworthy conditions.
3. The inability to reach the port of destination without
obtaining foreign repairs.
The term "casualty" as it is used in the statute, has been
interpreted as something which, like stress of weather, comes
with unexpected force or violence, such as fire, explosion, or
collision (Dollar Steamship Lines, Inc. v. United States, 5 Cust.
Ct. 28-29, C.D. 362 (1940)). In this sense, a "casualty" arises
from an identifiable event of some sort. In the absence of
evidence of such a casualty event, we must consider the repair to
have been necessitated by normal wear and tear (ruling letter
106159, September 8, 1983).
The applicant contends that the damage to the lower rudder
bearing and rudder, which caused an emergency diversion and
drydocking was clearly such a casualty. It states that it is
possible the some of the damage may have resulted from an earlier
grounding, that the damage to the rudder bearing did not become
apparent until much later. To substantiate its claims, the
applicant states the following:
Customs has long held that damage to underwater parts
of vessels "is usually not easily detectable or
susceptible of definite proof respecting the date and
place of occurrence" C.I.E. 1202/59, August 20, 1959.
Thus relief under 1466(d) is warranted even in the
absence of testimony showing that the vessel was
grounded, hit a submerged object or otherwise had a
casualty causing damage to an area not readily capable
of discovery or inspection. See Ves-13-18-CO::R:CD:C
105674 LLB, July 19, 1982; Ves-13-18-CO:R:CD:C 107993
GV.
The applicant has submitted documentation which shows that
the spade rudder and propeller was damaged due to a grounding.
The American Bureau of Shipping (ABS) report No. VA10504
indicated that the damage occurred in consequence of the vessel
grounding when moving astern departing Anchorage, Alaska, on July
10, 1989. It states that the damage to the rudder bearing was of
the nature which is impossible to occur as the result of ordinary
wear and tear.
The problems associated with detection are aggravated by the
fact that the apparatus in question is below the water line.
Having encountered this questions previously, Customs has ruled:
Experience demonstrates damage to underwater parts of
vessels, including propellers, is usually not easily
detectable or susceptible of definite proof respecting
the date and place of occurrence. Therefore, relief
under section [1466] is granted in the absence of
testimony showing that the vessel concerned was
grounded, struck bottom, or her propeller contacted
some floating object capable of causing damage, prior
to the commencement of the voyage (C.I.E. 1202/59,)
August 20, 1959.
Pursuant to C.I.E. 1202/59, relief is warranted for such
damages in absence of evidence showing that the vessel concerned
was grounded, struck bottom, or her propeller contacted some
floating object capable of causing damage prior to the commence
of the voyage. This position was upheld in both of the above
stated rulings (107993 GV and 105674 LLB). It is evident that
this damage resulted from an earlier grounding when the vessel
was moving astern departing Anchorage, Alaska, on July 10, 1989,
therefore relief is not warranted under C.I.E. 1202/59.
Pursuant to Customs ruling VES-13-18-R:CD:C 102707 BJF,
dated July 19, 1977, "...for the purpose of 19 U.S.C. 1466, a
voyage begins when a ship, having departed a port, is passing
upon the seas to another port or to several ports." This holding
is premised upon judicial precedent in conjunction with the
general interpretation of section 3114, Revised Statutes (19
U.S.C. 1466(a) that "the section is to be construed so as to give
as much protection as possible against the competition of foreign
labor." (see 33 Op. Atty. Gen. 432)
Accordingly, it is apparent that the subject vessel had not
yet "departed a port" or "passed upon the seas" when the vessel
suffered damage to the vessel's lower rudder bearing and rudder
while in the port of Anchorage. Therefore, the vessel was not
"compelled, by stress of weather or other casualty, to put into
such foreign port" for repairs pursuant to section 1466(d)(1) and
relief thereunder is not warranted as to item No. 00001-0034
rudder bearings. Accordingly, the cost associated with this
repair is dutiable.
A leading case in the interpretation and application of
1466 is United States v. Admiral Oriental Line et al., 18
C.C.P.A. 137 (T.D. 44359 (1930)). That case distinguished
between equipment and repairs on one hand and permanent additions
to the hull and fittings on the other, the former being subject
to duty under 1466.
The Court in Admiral Oriental, supra., cited with approval
an opinion of the Attorney General (27 Op. Atty. Gen 228). That
opinion interpreted 17 of the Act of June 26, 1884 (23 Stat.
57), which allowed drawback on vessels built in the United States
for foreign account, wholly or in part of duty-paid materials.
In defining equipment of a vessel, the Attorney General found
that items which 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...
While the opinion of the Attorney General interpreted a provision
of law other than 1466 or a predecessor thereto, it is
considered instructive and has long been cited in Customs Service
rulings as defining permanent additions to the hull and fittings
of a vessel.
Under long-standing and consistently applied administrative
policy, an installation, even one of a permanent nature, is
considered to be a dutiable repair rather than a modification if
the installation addresses a repair need. Thus, if an area of a
vessel is enhanced by the replacement of one permanent
installation with another, the operation is considered dutiable
if evidence reveals that a defect or wastage was present in the
former installation, which condition was cured by replacement.
In the present case, the applicant claims that the
installation of the following:
Item Nos.
00001-0043 soot blowing system
00001-0058 deck drain
00001-0067 reefer cable deck
00001-0069 rotary air compressor
00001-0071 rudder bearings
is a design and operational improvement over the old one. It is
claimed that these items were not found to be damaged at the time
they were replaced and that the permanent installation of the
subject items is to improve the efficiency of the vessel's
operation and should be properly considered a non-dutiable
modification.
Examination of the entire record, and additional
documentation submitted with the application, including that
portion of the invoice relating to the said items, reveals that
these items were installed to enhance the operation of the
vessel's efficiency and are permanent installations to the
vessel's hull and fittings. Accordingly, the said items are non-
dutiable.
With regard to the items of cost relating to these items
which are alleged to be U.S. owner-supplied parts, we have found
that the Customs administration of duty assessment issues under
section 1466 regarding U.S.-made materials purchased in the U.S.
had for some time been guided by the terms of Treasury Decision
75-257 (T.D. 75-257). That decision provides that when
materials of U.S.-manufacture are purchased by the vessel owner
in the U.S. for installation abroad by foreign labor, the labor
cost alone is subject to duty under section 1466. When those
same materials are purchased by the owner overseas or purchased
in the U.S. by parties other than the owner, the cost of the
materials themselves (even though of U.S.-manufacture) was also
subject to vessel repair duty.
The climate with regard to parts shipped abroad from the
United States for foreign installation was transformed on August
20, 1990, when the President signed Public Law 101-382 which
added a new subsection (h) to section 1466. While this
provision applies by its terms only to foreign-made imported
parts, there is ample reason to extend its effect to U.S.-made
materials as well. To fail to do so would act to discourage the
use of U.S.-made materials in effecting foreign repairs since
continued linkage of remission provisions of subsection (d)(2)
with the assessment provisions of subsection (a) of section 1466
would obligate operators to pay duty on such materials unless
they were installed by crew or resident labor. If an article is
claimed to be of U.S. manufacture, there must be proof of its
origin in the form of a bill of sale or domestic invoice. If an
article is claimed to have been previously entered for
consumption, duty paid by the vessel operator, there must be
proof of this fact in the form of a reference to the consumption
entry number for that previous importation, as well as to the
U.S. port of importation. If imported articles are purchased
from third parties in the United States, a domestic bill of sale
to the vessel operator must be presented. Further, with regard
to imported articles, there must be presented a certification
from the owner or master that the vessel at issue is a cargo
vessel and that the imported articles were purchased for
installation aboard the company's vessels.
If the elements stated above are proven to the satisfaction
of Customs, the cost of foreign labor utilized for installation
of U.S.-made or previously imported articles will be subject to
duty under section 1466 in matters concerning repairs, and only
the cost of qualifying materials used in repairs will be free of
duty. Modifications will of course continue to be treated as
duty-free, both materials and labor.
Since the applicant has not submitted the above stated
evidence to sustain that either duty has been paid on or that
certain other owner-supplied parts are of U.S. origin, the cost
of the owner supplied parts is dutiable. The application is
denied as to the following items.
Item Nos.
00004-0001 boiler tubes
00005-0001 life raft
00005-0003-0015 misc. items
00006-0001 sleeve
00008-0001 generator tubes
00010-0001 & 0002 bearings
00011-0001 Henz Service-material
00012-0001 Chemical Cerami - tech
00013-0001 paint
00014-0001 paint
00015-0001 paint
00016-0001 paint
00018-0001 labor
If, prior to liquidation, the proper certification and/or proof
of prior importation is presented, the said items considered
under section 1466(h) may be considered free of duty.
HOLDING:
1. The evidence presented is not sufficient to prove that
the foreign repairs performed on the subject vessel
were necessitated by a casualty occurrence, thus
warranting remission pursuant to 19 U.S.C. 1466. The
application is denied as to the casualty.
2. The installation of Item Nos. 00001-0043, 00001-0058,
00001-0067, 00001-0069, and 00001-0071 constitutes
modifications/ alterations/additions to the hull and
fittings rather than repairs. As such, the cost of
this work in not dutiable under 19 U.S.C. 1466.
3. Since the applicant has not submitted the above stated
evidence to sustain that either duty has been paid on
or that certain other owner-supplied parts are of U.S.
origin, the cost of the owner supplied parts is
dutiable. The application is denied as to these items.
If, prior to liquidation, the proper certification
and/or proof of prior importation is presented, the
said items considered under section 1466(h) may be
considered free of duty.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch