VES 13-18 CO:R:IT:C 112025 MLR
Deputy Assistant Regional Commissioner
Commercial Operations Division
423 Canal Street
New Orleans, Louisiana 70130-2341
RE: Vessel Repair; 19 U.S.C. 1466; Application for Relief;
Vessel Repair Entry No. C16-0008522-4; M/V NEDLLOYD HOLLAND V-39
Dear Sir:
This letter is in response to your memorandum of December 4,
1991, which forwards for our review and consideration the above-
referenced Application for Relief from the assessment of vessel
repair duties submitted by Sea-Land Service, Inc.
FACTS:
The record reflects that the subject vessel, the M/V
NEDLLOYD HOLLAND, arrived at the port of Charleston, South
Carolina, on July 18, 1991. Vessel repair entry, number C16-
0008522-4, was filed on the same day as arrival indicating work
performed on the vessel in Bremerhaven, Germany.
The vessel owner timely filed an application for relief on
September 5, 1991. Numerous invoice items are claimed
nondutiable. We are asked to review the dutiability of the
following items:
Lloyd-Werft Invoice 0-161:
1. Item 028: Sea-chest inspection operations which may involve
some repair elements.
2. Item 033: Coating applied to the fathometer well.
3. Item 092A: Alleged modifications to compressed starting air
system
4. Items 192 and 195: The segregated cost of venting
operations and lighting.
Lloyd-Werft Invoice 0-186:
5. Items 020 and 039: Propeller replacement
6. Item 206D: Test done in conjunction with stern tube seals
overhaul.
Lloyd-Werft Invoice 0-187:
7. Item 137: Transport Cost.
8. Lloyd-Werft Invoice 0-185: Combination of modification and
repair.
9. IHI 195-HL-7069: Origin of O-Rings.
ISSUE:
Whether the foreign work performed on the subject vessel for
which the applicant seeks relief is dutiable under 19 U.S.C.
1466.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466, 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 foreign or
coastwise trade, or vessels intended to engage in such trade.
I. Lloyd-Werft Invoice 0-161:
Certain vessel inspection operations are generally
considered non-dutiable. Where periodic surveys are undertaken
to meet the specific requirements of, for example, a
classification society or insurance carrier, the cost of the
surveys is not dutiable even when dutiable repairs are effected
as a result thereof. C.S.D. 79-277. With increasing frequency,
this ruling has been utilized by vessel owners seeking relief not
only from charges appearing on an A.B.S. or Coast Guard invoice
(the actual cost of the inspection), but also as a rationale for
granting non-dutiability to a host of inspection-related charges
appearing on a shipyard invoice.
Pursuant to published Customs Service rulings (C.I.E.
1325/58 and C.I.E. 565/55), duties may not be remitted in
circumstances in which invoices fail to segregate dutiable from
non-dutiable expenditures. Such is the case in regard to invoice
item 028 which involves opening sea-chests for cleaning and
inspection by the Coast Guard and American Bureau of Shipping.
Included in the item is the unsegregated cost of renewing missing
or defective fasteners, a repair expense. The presence of this
unsegregated expense renders the entire item subject to duty as a
repair expense.
The same rationale may be applied to item 033, the
inspection of the fathometer well. Customs has held that
painting performed on existing portions of a vessel is in the
nature of a dutiable maintenance operation. C.I.E. 1043/60, and
Treasury Decisions 21670, 39507, and 43322. Customs has also
held that coating with substances which have protective and
preservative qualities is analogous to painting and therefore is
dutiable (see C.I.E.'s 1203/60, 518/63 and 2045/66). The process
of chipping, scaling, cleaning, and wire brushing to remove rust
and corrosion that results in the restoration of a deteriorated
item in preparation for painting has also been held to be
dutiable maintenance. States Steamship Co. v. United States, 60
Treas. Dec. 30, T.D. 45001 (Cust. Ct. 1931). These precedents
are relevant to the operation performed in invoice item 033 which
details the scaling and coating of the fathometer well. The item
must be considered dutiable.
With regard to item 092A, the applicant alleges that
modifications were made to the compressed starting air system.
The invoice indicates that one piece of cooler tube was replaced
from the ship's spares. The cost of testing and inspection is
DM3.910 (German Marks), and the cost of repairs is DM21.213.
In its application of section 1466, Customs has held that
modifications to the hull and fittings of a vessel are not
subject to vessel repair duties. Over the course of years, the
identification of modification processes has evolved from
judicial and administrative precedent. In considering whether an
operation has resulted in a modification which is not subject to
duty, the following elements may be considered.
1. Whether there is a permanent incorporation into the hull or
superstructure of a vessel [see United States v. Admiral
Oriental Line et al., T.D. 44359 (1930] 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 cost of which is 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. It follows that a "permanent
attachment" takes place that does not necessarily involve a
modification to the hull and fittings.
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 which
is not in good working order.
4. Whether an item under consideration provides an improvement
or enhancement in operation or efficiency of the vessel
Very often, when considering whether an addition to the hull
and fittings took place for the purpose of 19 U.S.C. 1466, we
have considered the question from the standpoint of whether the
work involved the purchase of "equipment" for the vessel. It is
not possible to compile a complete list of items that might be
aboard a ship that constitute its "equipment". An unavoidable
problem in that regard stems from the fact that vessels differ as
to their services. What is required equipment on a large
passenger vessel might not be required on a fish processing
vessel or offshore rig.
"Dutiable equipment" has been defined to include:
...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. Admiral Oriental,
supra., (quoting T.D. 34150, (1914))
By defining what articles are considered to be equipment,
the Court attempted to formulate criteria to distinguish non-
dutiable items which are part of the hull and fittings of a
vessel from dutiable equipment, as defined above. These items
might be considered to include:
...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... Admiral Oriental,
supra., (quoting 27 Op. Atty. Gen. 228).
A more contemporary working definition might be that which
is used under certain circumstances by the Coast Guard; it
includes a system, accessory, component or appurtenance of a
vessel. This would include navigational, radio, safety and,
ordinarily, propulsion machinery.
Further, we have held that the removal of an existing,
operational system for the purpose of improving the efficient
performance of the vessel is not dutiable provided that the work
was not performed in conjunction with dutiable repairs.
Headquarters Ruling Letter 109971, dated June 12, 1989. 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 regard to the item specified for our review, we note
that the work done to the compressed starting air system
constitutes a dutiable repair and/or dutiable work done in
conjunction with such repair rather than a nondutiable
modification. The record also does not contain any evidence
that the replaced cooler tube came from the ship's spares, and
that applicable duty thereon has been paid. There appears to be
no proof, other than a self serving statement that it was
replaced from the ship's spares.
In addition, we note that C.S.D. 79-277 does not exempt from
duty repair work done by a shipyard in preparation of a required
survey. Nor does it exempt from duty the cost of any testing by
the shipyard to check the effectiveness of repairs found to be
necessary by reason of the required survey. Therefore, the
testing and inspection, indicated under item 092A, is dutiable.
Items 192 and 195 designate segregated costs for venting
operations and lighting. In the case of United States v. George
Hall Coal Co., 134 F. 1003 (1905), it was held that any of
various types of expenses associated with foreign shipyard
operations are classifiably free from the assessment of duty,
regardless of the character of the overall shipyard work (repair
vs. modification). The case found that the expense of drydocking
a vessel is not a repair cost. Drydocking is not an isolated
expense, and is commonly associated with numerous others. These
may include, but are not limited to, sea water supply (for
firefighting capability), fresh water supply, hose hook-up and
disconnection, fire watch services, shore power hook-up, etc. We
would place the segregated cost of venting (item 192) in this
category and would thus allow as duty-free such an expense as it
appears in invoice item 189.
Similarly, pursuant to CD 1836 charges for drydocking, for
furnishing electricity, air and water, fees paid for the use of
tugs and pilots in drydocking and undocking a vessel, and crane
expenses are not dutiable repairs if segregated on the invoice.
The cost of lighting (items 192 and 195) is therefore not
dutiable. However, the cost of obtaining a gas free certificate
constitutes an ordinary and necessary expense incident to repair
operations and is accordingly dutiable. C.I.E. 1188/60. The
charge, though, should be apportioned between the costs which are
to be remitted and those for which relief is not warranted, and
duty assessed on that portion of the charge applicable to items
which are not being remitted.
II. Lloyd-Werft Invoice 0-186:
If a survey is conducted to ascertain the extent of damage
sustained, whether repairs are necessary, or if the work was
adequately completed, then the costs are dutiable as part of the
repairs that are accomplished. C.I.E. 429/61; C.S.D. 79-2, 13
Cust. B. & Dec. 993 (1979); C.S.D. 79-277, 13 Cust. B. & Dec.
1395, 1396 (1979). Therefore, items 020 and 039, which involved
an inspection of the propeller and tailshaft to determine the
extent of damages, are dutiable. Further, the stern tube oil
system pressure test (item 206D), which checked the effectiveness
of repairs conducted in the stern tube seals overhaul (a dutiable
repair), constitutes a dutiable inspection.
III. Lloyd-Werft Invoice 0-187:
Customs has consistently held that transportation charges of
parts, equipment, or machinery to and from the job are not
dutiable as expenses of repairs, if properly segregated from the
repair charges. C.D. 1836; C.I.E. 204/60; C.I.E. 518/63; C.I.E.
1325/58. Because the cost for the transport of parts is
segregated from the repairs conducted to the cylinder block (item
137), these transportation costs are not dutiable.
IV. Lloyd-Werft Invoice 0-185:
Next, we consider the invoice depicting work done to a
damaged crosshead. The applicant has broken out the costs as:
Modifications DM12.000, Removals DM13.390, Transport DM8.005, and
Repairs DM15.625. In support of the claim that the work
performed is a modification, the applicant has submitted a
"Technical Information Diesel Bulletin" from Sulzer, indicating
that the cylinder cover stud can be modified to prevent cracking.
The operation basically involved: work on the crosshead (i.e.,
removal, polishing, removing the cylinder cover and piston,
opening the crosshead bearings, removing the crosshead guides,
reinstallation, and pressure testing); removing and replacing six
bolts from the vessel's spares, and sealing them with special
Silicone jointing compound; cuting the existing thread holds in
the cylinder block; inspecting the bolts for cracks; and
modifying the bolts, as directed by the Sulzer Bulletin drawing.
As discussed above, (see section relating to modifications)
the issue is whether the work described would constitute
modifications to the hull and fittings so as to render the work
nondutiable under 19 U.S.C. 1466. The only part of the work
performed that possibly constitutes a modification involves work
described under (b) of the invoice: the existing stay bolts are
inspected for cracks, and are "modified" according to the Sulzer
drawing. 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. As
stated above, we have 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.
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, we note that the work performed relates
less to a new design feature, but more to a defect present in the
former installation which was cured by inspecting and reshaping
the bolts. Further, the "overhaul" and polishing of the
crosshead relates more to maintenance; therefore, the costs
incurred, except for transportation, are dutiable.
V. IHI 195-HL-7069:
The applicant claims that duty on the spare O-Rings was
already paid . The vessel repair statute exempts from duty
spare repair parts or materials that have been manufactured in
the United States or have been previously imported into the
United States as commodities with applicable duty paid under the
Harmonized Tariff Schedule of the United States. 19 U.S.C.
1466(h). For purposes of this section, where a part is purchased
from a party unrelated to the vessel owner, a United States bill
of sale constitutes sufficient evidence to demonstrate that the
part was either manufactured in the United States or entered in
the United States, duty-paid. In cases in which the vessel
operator or a related party has acted as the importer of foreign
materials, or where materials were imported at the request of the
vessel operator for later use by the operator, the vessel repair
entry will identify the port of entry and the consumption entry
number for each part installed on the ship which has not
previously been entered on a Customs Form 226. It is our policy
to require evidence beyond an affidavit from an interested party
to establish U.S. manufacture and U.S. purchase.
We have reviewed the invoices included in the application
and have determined that the applicant's explanations on how the
duty could have been paid, do not satisfy the evidentiary
requirements for duty exemption. The O-Rings are not of U.S.
origin (purchased in Japan), nor is their any record of a
Customs Form 226 indicating that duty was paid. For these
reasons, the O-Rings are dutiable.
HOLDING:
After review of the evidence before us, we recommend that
the application for relief be denied in part and allowed in part,
as specified in the Law and Analysis section of this ruling.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch