VES-13-18 CO:R:IT:C 112795 BEW
Deputy Regional Director
Commercial Operations
U.S. Customs Service
Pacific Region
One World Trade Center
Long Beach, California 90831--700
RE: Vessel Repair Entry No. 906-3605053-7, S/S ASPEN,
Modifications; drydocking; surveys; 19 U.S.C. 1466; 19 CFR
4.14
Dear Sir:
This is in reference to your memorandum of June 28, 1993,
which transmitted an application for relief from duties filed by
Aspen Tanker, Inc., in relation to the above referenced vessel
repair entry dated March 26, 1993. The entry and the application
were timely filed. The vessel arrived at the port of Portland,
Oregon, on March 20, 1993.
FACTS:
The S/S ASPEN is a United States-flag vessel owned by Aspen
Tanker, Inc. The subject vessel arrived in the United States
after having extensive foreign vessel repair work performed at
the Mitsubishi Heavy Industries, Ltd., shipyard in Nagasaki,
Japan, during the period of October 12, 1992 through March 5,
1993. Customs and the vessel operator are in substantial
agreement on the issue of dutiability, and only (6) six items are
offered for our review.
The entire vessel repair entry involves a potential duty of
$224,933.50.
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 (10 U.S.C. 1466) and section 4.14 of the Customs
Regulations (19 CFR 4.14).
The applicant claims that certain items listed on Mitsubishi
Heavy Industries, Ltd. invoice No. 3142-543320-01 are nondutiable
costs for modifications and surveys. You have requested our advice concerning the following
repairs that relate to modifications/alterations/additions.
Item No. Invoice Description
106((1) Mitsubishi Heavy Industries Snipping Off
3142-543320-01
203 Mitsubishi Heavy Industries Vent Riser
(a)(b)& (c) 3142-543320-01 Retrofitting
203 Mitsubishi Heavy Industries Vent Riser
(addition) 3142-543320-01 Retrofitting
7 American Bureau of Shipping Drydocking &
6002199182 Boiler survey
8 Nahakita Seisahusho SK-550A valve
9210M-15 Used in shipyard
006(d) Mitsubishi Heavy Industries Cargo line gas-
3142-543320-01 free certificate
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 the costs for ABS drydocking and boiler surveys
constitute dutiable repair costs.
(3) Whether the cost associated with a gas free certificate
constitutes a dutiable repair cost.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466, provides in
pertinent part for payment of duty in the amount 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 engage in such trade.
In its application of the vessel repair statute, the Customs
Service has held that modifications, alterations, or additions to
the hull and fittings of a vessel are not subject to vessel
repair duties. Over the course of years, the identification of
work constituting modifications on the one hand and repairs on
the other has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a
modification that 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, 18 C.C.P.A. 137 (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.
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 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 under consideration provides an
improvement or enhancement in operation or efficiency
of the vessel.
For purposes of section 1466, 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.
T.D. 34150, 26 Treas. Dec. 183, 184 (1914)(quoted with approval
in Admiral Oriental).
In the present case, the applicant claims that the
installation of the following:
Item No. 203 (a)(b)& (c)- Mitsubishi Heavy Industries
invoice No. 3142-543320-01, Vent Riser Retrofitting
Item No. 203 (additional) - Mitsubishi Heavy Industries
invoice No. 3142-543320-01, Vent Riser Retrofitting
Nahakita Seisahusho invoice No. 9210M-15, SK-550A valve
(Used in installation of shipyard item No. 203)
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 the 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 modifications/
additions/alterations to the hull and fittings of the vessel
remissible under the statute.
The applicant claims that Item 106((1) Mitsubishi Heavy
Industries - Snipping off is a modification to the vessel's hull
and fittings. The applicant claims that the snipping operation
was performed to prevent future cracking of the left bulkhead.
Item 106(2) indicates that cracks were gouged and rewelded. It
is apparent that the work in question was due to an ongoing
problem. In this regard we note that the third element enumerated
on page 3, one of the four listed which are taken into
consideration in determining whether a particular procedure has
resulted in a modification, states as follows:
3. Whether, if not a first time installation, an item
under consideration constitutes a new design feature
and does not merely replace a part, fitting, or
structure that is performing a similar function.
Under Customs 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 the evidence reveals that a defect or wastage was
present in the former installation, which condition was cured by
replacement. (See ruling l10551 LLB, dated December 12, 1989).
Accordingly, the work for which the applicant seeks relief
in item 106(1) which was necessary due to a recurring repair
need, constitutes dutiable repairs rather than non-dutiable
modifications.
With regard to the ABS Drydocking and boiler survey, Customs
has held that where periodic surveys are undertaken to meet the
specific requirements of a classification society, insurance
carrier, etc., the cost of the surveys is not dutiable even when
dutiable repairs are effected as a result thereof; however, in
the liquidation process Customs should go beyond the mere labels
of "continuous" or "ongoing" before deciding whether the item is
dutiable. If an inspection or survey is conducted as a part of
an ongoing maintenance and repair program labelled "continuous"
or "ongoing" the cost is dutiable. Also, if the survey is 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 holdings in C.I.E.
429/61, C.S.D. 79-2, and C.S.D. 79-277. Accordingly, the ABS
docking survey is non-dutiable, and the boiler survey is
dutiable as a part of the boiler repairs.
Item 006(d) - cargo line gas-free certificate listed on MBI
invoice No. 3142-543320-01 covers the cost incurred for obtaining
a gas free certificate. Pursuant to C.I.E.'s 1188/60 and 429/61
the cost of obtaining a gas free certificate constitutes an
ordinary and necessary expense incident to repair operations and
is dutiable. This charge 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 latter. Accordingly, the cost associated with item
006(d) should be prorated.
HOLDING:
1. The installation of Item Nos. 203 (a), (b), and (c), 203
(additional) and Item 8 constitutes modifications/alterations/
additions to the hull and fittings of the vessel rather than
repairs. As such, the cost of this work is not dutiable under 19
U.S.C. 1466.
2. The work for which the applicant seeks relief in item 106(1)
which was necessary due to a recurring repair need, constitutes
dutiable repairs rather than non-dutiable modifications.
3. The cost for the ABS docking survey is non-dutiable, and the
cost for the boiler survey is dutiable as a part of the boiler
repairs.
4. The cost of the all charges for obtaining a gas-free
certificate, item 006(d), 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 latter.
Sincerely,
Arthur P. Schifflin
Chief
Carrier Rulings Branch