VES-13-18-CO:R:IT:C 112128 MLR

Deputy Assistant Regional Commissioner
Commercial Operations
423 Canal Street
New Orleans, Louisiana 70130-2341

RE: Vessel Repair; 19 U.S.C. 1466; Vessel Repair Entry No. C15-0012369-5; Application for Relief; M/V GREEN WAVE V-48

Dear Sir:

This is in response to your memorandum of March 17, 1992, regarding the application for relief submitted by Central Gulf Lines, Inc.

FACTS:

The record reflects that the M/V GREEN WAVE, arrived at Sunny Point, North Carolina, on December 4, 1991. Vessel repair entry, number C15-0012369-5, was filed on December 10, 1991, indicating foreign work performed on the vessel. An application for relief was filed on February 3, 1992. We are asked to review the dutiability of the following items:

1. Cleaning in Wilton-Fijenoord Invoice 6988/10955, items H1.1, H15.1-15.6, M1, M4, and M9; and invoice 6888/10964, item H11. 2. Access in Wilton-Fijenoord invoice 6988/10955, item H3.1. 3. Repair in Wilton-Fijenoord invoice 6988/10955, item H17. 4. Container Sockets in Wilton-Fijenoord invoice 6988/10955, item 144. 5. CONVER invoice 302180 6. Examination of Hull Repairs listed in ABS Survey invoice 110389. 7. U.S. Source Parts 8. Taxes assessed in DILAGO invoice, entry item 34.

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.

1. Cleaning in Wilton-Fijenoord Invoice 6988/10955, items H1.1, H15.1-15.6, M1, M4, and M9; and invoice 6888/10964, item H11.

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.

C.S.D. 79-277 discussed the dutiability of certain charges incurred while the vessel underwent biennial U.S. Coast Guard and A.B.S. surveys. That case involved the following charges:

ITEM 29 (a) Crane open for inspection. (b) Crane removed and taken to shop. Crane hob and hydraulic unit dismantled and cleaned. (c) Hydraulic unit checked for defects, OK. Sundry jointings of a vessel's spare renewed. (d) Parts for job repaired or renewed. (e) Parts reassembled, taken back aboard ship and installed and tested.

In conjunction with the items listed above, we held that a survey undertaken to meet the specific requirements of a governmental entity, classification society, or insurance carrier is not dutiable even when dutiable repairs are effected as a result of the survey. We also held that where an inspection or survey is conducted merely to ascertain the extent of damages sustained or whether repairs are deemed necessary, the costs are dutiable as part of the repairs which are accomplished.

It is important to note that only the cost of opening the crane was exempted from duty by reason of the specific requirements of the U.S. Coast Guard and the A.B.S. The dismantling and cleaning of the crane hob and hydraulic unit was held dutiable as a necessary prelude to repairs. Moreover, the testing of the hydraulic unit for defects was also found dutiable as a survey conducted to ascertain whether repairs were necessary. Although the invoice indicated that the hydraulic unit was "OK," certain related parts and jointings were either repaired or renewed. Therefore, the cost of the testing was dutiable.

We emphasize that the holding exempts from duty only the cost of a required scheduled inspection by a qualifying entity (such as the U.S. Coast Guard or the American Bureau of Shipping). In the liquidation process, Customs should go beyond the mere labels of "continuous" or "ongoing" before deciding whether a part of an ongoing maintenance and repair program labelled "continuous" or "ongoing" is dutiable. The cost of cleaning which accompanies the operator's maintenance and repair program is dutiable.

Moreover, we note that C.S.D. 79-277 does not exempt repair work done by a shipyard in preparation of a required survey from duty. 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.

Turning to the case before us, the applicant contends that certain cleaning costs are non-dutiable.

Item H1.1 - Hull Cleaning/blasting/painting (owners' supply). By the fact that the area was waterwashed, spotblasted, and painted (see item H1.2), a dutiable maintenance operation, the cleaning done beforehand was clearly in preparation of and an integral part of the repairs. Examination, inspections and cleaning which involve no dutiable elements, to include repair or maintenance, are the only instances in which they are not dutiable. C.D. 1830 (emphasis added).

Items H15.1, H15.2, H15.3, H15.4, (hatchcovers no. 1-4 respectively), and item H15.6 (Control Stations). These items state that "renewals as per specification" were made. The applicant concedes that the labor and material are dutiable; therefore, since the cleaning is an integral part of repairs, the cost of cleaning is dutiable.

Further, we take this opportunity to caution the applicant of submitting an invoice from a shipyard that only indicates work was performed "as per specification," with no other description of the work performed by the shipyard. What is required is an invoice with an unbiased description of the work performed by the shipyard.

Item M1 - Seavalves. The cleaning of the various valves involved dutiable overhauling operations; therefore, the cleaning involved in this item is dutiable. The only exception is the subitem pertaining to B.F. valve 350mm, and B.F. valves 300mm, which solely involved cleaning and checking them without any dutiable repairs. The "labour for inspection" costs listed several times in this item remain dutiable. As stated above, the cost incurred to check the effectiveness of repairs is dutiable.

Item M4 - M.E. turbocharger. The cleaning operations are dutiable in that they are an integral part of repairs.

Item M9 - Main Generators. Since we are unable to determine whether this item involved repairs, the cleaning is dutiable. The applicant has the burden to establish that a cleaning operation was not in preparation of, or an integral part of repairs.

Invoice 6988/10964, Item H11 - Bulbous Bow. The cleaning is dutiable in that damage repairs, welding and painting, were carried out.

2. Access in Wilton-Fijenoord invoice 6988/10955, item H3.1.

The item partially states that "2 x 2 Bars of bow thruster tunnel gratings removed and refitted for access." It appears that to access the zinc anodes which were supplied and fitted, the bars of the bow thruster tunnel gratings had to be removed and replaced. Customs has long held that accessing which is an integral part of dutiable repairs is likewise dutiable. HQ 108366.

3. Repair in Wilton-Fijenoord invoice 6988/10955, item H17 - Stores Crane.

The installation of the owner supplied stores crane at a different location on the vessel is considered a non-dutiable modification. However, the repair of five damaged control levers is considered a dutiable repair. 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.

4. Container Sockets in Wilton-Fijenoord invoice 6988/10955, item 144 - Reefer container power supply.

This item indicates that "24 Owners' supplied reefer container sockets fitted." It is not clear from this description whether the container sockets were fitted on the vessel or the reefer. If the sockets were fitted on the vessel and replaced other sockets, this would constitute a repair. Absent further information, this item is dutiable.

5. CONVER invoice 302180

This invoice indicates that bridge fittings, twistlocks, and turnbuckles were supplied. The record does not reflect that these items were used to repair a container that is an instrument of international traffic. Absent such information, the cost of this invoice is dutiable.

6. Examination of Hull Repairs listed in ABS Survey invoice 110389.

Applicant claims that this ABS survey should be non-dutiable because "the test performed in connection with surveys or regulatory examinations is non-dutiable since it is being performed strictly to comply with the requirements of the survey or examination....This type of action is not done for the purpose of maintenance or repair, but is only a consequence of the survey or examination, and therefore should be non-dutiable."

We find that the survey costs for this item were incurred because of the bulbous bow damage repairs, depicted in Wilton- Fijenoord invoice no. 6988/10964. 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. However, if a survey is conducted to ascertain the extent of damage sustained, or to ascertain if the work is adequately completed, the costs are dutiable as part of the repairs which are accomplished pursuant to the holdings in C.I.E. 429/61, C.S.D. 79-2, and C.S.D. 79-277. (Emphasis added). This is a situation where repairs to the hull were conducted and the ABS surveyed the area to ascertain if the work was adequately completed; therefore, the cost is dutiable.

ABS Survey invoice R0000179 - Part Cont. Machinery Survey. Since the applicant has only submitted the ABS invoice and not the ABS Survey Report, we are unable to determine whether the cost incurred for "Part Cont. Machinery Survey" was conducted solely as part of a periodic survey to meet the specific requirements of the ABS, or to determine the adequacy of repairs conducted. In the liquidation process Customs should go beyond the mere labels of "continuous" or "ongoing" before deciding whether a part of an ongoing maintenance and repair program labelled "continuous" or "ongoing" is dutiable. (Emphasis added). Therefore, the cost of this item is dutiable absent further information.

7. U.S. Source Parts

Applicant claims that relief on various invoices, depicted below, should be granted in that they are U.S. parts remissible under Section 4.14(c)(3)(ii), Customs Regulations, and/or are consumables classified as duty-free under section 4.14(a), Customs Regulations.

On August 20, 1990, the President signed into law Pub. L. 101-382, section 484E of which amends section 466, Tariff Act of 1930, as amended (19 U.S.C. 1466), by adding a new paragraph (h) to the statute {19 U.S.C. 1466(h)}.

Section 1466(h) provides in pertinent part that:

(h) The duty imposed by subsection (a) of this section shall not apply to--

(2) the cost of spare repair parts or materials (other than nets or nettings) 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.

The effective date of the amendment is stated as follows:

Effective Date.--The amendment made by this section shall apply to--

(1) any entry made before the date of enactment of this Act that is not liquidated on the date of enactment of this Act, and

(2) any entry made-- (A) on or after the date of enactment of this Act, and (B) on or before December 31, 1992.

While section 1466(h) 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 a foreign manufactured 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 in the United States from a party unrelated to the vessel operator, a domestic bill of sale to the vessel operator must be presented.

Further, with regard to imported articles, there must be presented a certification on the CF 226 or an accompanying document by a person with direct knowledge of the fact that an article was imported or purchased for the purpose of either then- existing or intended future installation on a company vessel. Ordinarily, the vessel's master would not have direct knowledge of that fact, and an agent may also be without such knowledge. The second certification required by 19 U.S.C. 1466(h)(2) as to the vessel's documentation (foreign or coasting trades) and service (cargo vessel), will be made by the master on the vessel repair entry (CF 226) at the time of arrival.

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.

A U.S. bill of sale has been submitted for the following; therefore, the costs associated with these invoices are not subject to duty provided a certification is presented that the vessel is a cargo vessel and that the articles were purchased for installation on the vessel.

General Engineering Entry item 15 Schiller Service Corp. 16 Woodward Governor Co. 17 Hydradyne/Hydraulics 19 William H. Swan 20 Drew Ameroid 23 Baker Lyman 31

Gulf-Best Electric, Inc. - Entry item 18. The invoice indicates that the items were manufactured in the United States. No certification as to the intended use of the items is therefore required.

Emery Worldwide - Entry item 21. The record reflects that main engine exhaust valve cages, in the amount of $14,942.88, were sent from Central Gulf Lines in New Orleans, Louisiana, to Wilton- Fijenoord in Rotterdam, The Netherlands. Only a Central Gulf shipping manifest is submitted. To avoid the payment of duty either a U.S. bill of sale with a statement that the exhaust valves were manufactured in the United States must be presented, or if the exhaust valves were previously imported by Central Gulf with duty paid, the consumption entry verifying this with a certification stating that they were imported for the installation on the subject vessel must be presented.

Emery Worldwide - Entry item 22. No invoice is submitted for these items. Absent the required evidence, detailed above, the items are dutiable.

Emery Worldwide - Entry item 24. Only an air freight bill is submitted. Again, absent more evidence, the items are dutiable.

Chevron International - Entry items 25 and 27. Entry item 27 in particular states "Warehouse location - Hamburg, Germany." This indicates that duty on these items were not previously paid, nor is there a statement made by Chevron that these are U.S. manufactured items. Absent this evidence, entry item 27 is dutiable. Since entry item 25 provides no information concerning the "Warehouse Location", we treat it the same as entry item 27. Further, we are unsure from the descriptions provided if the items are duty-free consumables.

Vecom USA Ltd. - Entry item 32. These items are duty-free consumables.

8. Taxes assessed in DILAGO invoice, entry item 34.

As to the tax paid, in CIE 538/62 we held that taxes paid to a foreign country are a component part of the expenses of repairs and are dutiable as such.

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