VES-13-18-RR:IT:EC 113977 GEV
Chief, Residual Liquidation and Protest Branch
U.S. Customs Service
6 World Trade Center
New York, New York 10048-0945
RE: Vessel Repair Entry No. C46-0016953-5; M/V NOSAC RANGER; V-141; Drydocking Surveys; General Services; Modification; Parts; 19 U.S.C. § 1466
Dear Sir:
This is in response to your memorandum dated May 23, 1997, forwarding an application for relief from duties assessed pursuant to 19 U.S.C. § 1466. You request our review of numerous expenditures contained within the above-referenced entry and separated into sections A-F in your memorandum. Our findings are set forth below.
FACTS:
The NOSAC RANGER is a U.S.-flag vessel owned by Car Carrier, Inc., of Dover, Delaware. Subsequent to the completion of various foreign shipyard work, the vessel arrived at Bayonne, New Jersey, on November 14, 1995. A vessel repair entry was timely filed on November 17, 1995.
An application for relief with supporting documentation was timely filed. The applicant seeks relief with respect to numerous items listed within the above-referenced vessel repair entry.
ISSUE:
Whether the costs for which the applicant seeks relief are dutiable under 19 U.S.C.
§ 1466.
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LAW AND ANALYSIS:
Title 19, United States Code, § 1466, provides in pertinent part for the payment of an ad valorem duty of 50 percent of the cost of "...equipments, or any part thereof, including boats, purchased for, or the repair parts or materials to be used, or the expenses of repairs made in a foreign country upon a vessel documented under the laws of the United States..."
Section A of your memorandum covers various costs listed on Wilton-Fijenoord (WF) invoice no. 7416/50781. Included among the costs for which the applicant seeks relief are those characterized as "Drydocking" and "Services and Facilities", listed under Item Nos. 101.1 (p. 1 of the application) and 102 (pp. 2-3 of the application), respectively. With respect to the latter, the specific costs in question that are listed on pp. 2-3 of the application include the following: gas free certificate, shore power, compressed air, fire main, communications, garbage and trash removal, cooling water, protective covers, CO2 system, crane services, sewage disposal, engine room bilges, and parts and material handling.
With respect to the above-referenced costs, we note that the record indicates that they were incurred pursuant to both dutiable and non-dutiable work. It is Customs position that in light of the decision of the U.S. Court of Appeals for the Federal Circuit in Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (1994), such costs are to be prorated between the dutiable and non-dutiable costs contained within an entry. (Customs ruling letter 113474, dated October 24, 1995) Accordingly, the subject costs are to be so apportioned.
In regard to the costs for clerical services (listed on pp. 3-5 of the application), crane services (listed on pp. 5-6 of the application), staging (listed on p. 7 of the application), transportation (listed on pp. 7-9 of the application), security fire watch (listed on p. 9 of the application) and a marine chemist (listed on p. 10 of the application), we note that all were incurred only in conjunction with dutiable repairs and are therefore dutiable pursuant to the decision of the CAFC in Texaco, supra (see Customs memoranda 113308 and 113350), with the exception of the clerical and transportation charges appearing in Item No. 102.4 which should be prorated as discussed above.
The following costs were itemized on WF Invoice No. 7416/50781and claimed by the applicant to be non-dutiable as a direct result of carrying out required regulatory inspections and class surveys for the U.S. Coast Guard (USCG) and Det Norske Veritas (DNV): Item Nos. 105.1; 106; 106.2; 108.1; 108.2; 109.1; 109.2; 109.3; 109.4; 501 (p. 23 of the invoice); 102.5C; 501 (p. 40 of the invoice); and WF 220. In regard to the dutiability of inspection/survey costs, we note that C.S.D. 79-277 stated that, "[i]f the survey was undertaken to meet the specific requirements of a governmental entity, classification society, insurance carrier, etc., the cost is not dutiable even if dutiable repairs were effected as a result of the survey."
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With increasing frequency, this ruling has been utilized by vessel owners seeking relief not only from charges appearing on an American Bureau of Shipping (ABS) or U.S. Coast Guard invoice (the actual cost of the inspection) but also as a rationale for granting nondutiability to a host of inspection-related charges appearing on a shipyard invoice. Our position with respect to this ruling is as follows.
C.S.D. 79-277 discussed the dutiability of certain charges incurred while the vessel underwent biennial U.S. Coast Guard and ABS 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 a 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 (emphasis added).
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 ABS. 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 ABS). 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 labeled "continuous" or "ongoing" is dutiable.
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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.
With respect to the inspection/survey-related costs under consideration, our review of the invoice indicates that these costs were not related to dutiable repairs. Accordingly, these costs are non-dutiable.
Item 109.2 on p. 33 of WF Invoice No. 7416/50781 covers the installation of a spare propeller storage stand claimed by the applicant to be a modification. In its application of the vessel repair statute, Customs has held that modifications to the hull and fittings of a vessel are not subject to vessel repair duties. The identification of work constituting modifications vis-a-vis work constituting repairs 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 have been considered. These factors are not by themselves necessarily determinative, nor are they the only factors which may be relevant in a given case. However, in a given case, these factors may be illustrative, illuminating, or relevant with respect to the issue of whether certain work may be a modification of a vessel which is nondutiable under 19 U.S.C. § 1466.
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
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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.
Upon reviewing the record, we note that the spare propeller storage stand covered by Item no. 109.2 was permanently incorporated into the vessel’s deck by welding, would therefore remain aboard the vessel during an extended lay-up, is a new installation that does not replace an existing defective feature, and enhances the vessel by providing a storage area for a spare propeller. In consideration of these factors it is readily apparent that the criteria for a non-dutiable modification have been met. Accordingly, this item is non-dutiable.
Section B of your memorandum covers the following costs for which the applicant seeks relief: Jotun Valspar Marine Coatings invoice no. 9012739 ("Exchange Rate Variance"); Williams & Wells Co., invoices nos. 690843 (U.S.-origin STP oil treatment), 690947 (freight charges incurred for the shipment of non-dutiable materials), 692064 (consumables and U.S-origin coatings); Detyens Shipyard, Inc. invoice no. 6089 (U.S.-origin parts and materials); Kvaerner Ships Equipment, Inc. invoice nos. 1576, 1261 and 1335 (U.S.-origin parts). These costs are not subject to duty under the vessel repair statute.
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Section C of your memorandum covers surveys listed on DNV invoice no. 181-581000. We have reviewed these surveys and the supporting DNV documentation submitted in light of Customs position with respect to such expenditures (see the above discussion of survey costs). As a result, we conclude that with the exception of the damage repair survey, the remainder of the surveys listed on the subject DNV invoice are non-dutiable periodic surveys. The overtime, car mileage and sundry expenses listed on the invoice are attributable to the aforementioned dutiable and non-dutiable surveys and therefore should be prorated. (Customs ruling letter 113474)
Section D of your memorandum concerns the applicant’s request for relief for travel expenses, transportation, equipment rental and living expenses itemized on the following invoices: Wilson Walton invoice no. 00027351; Kvaerner Ships Equipment, Inc. invoice no. 1719; Turbo Technik invoice no. 703-95; Chris Marine AB invoice no. 2734; Man Rollo B.V invoice no. 42007; and AEG Nederland N.V. invoice no. 951507. These expenses were incurred pursuant to dutiable repairs. Accordingly, pursuant to the decision of the CAFC in Texaco, supra, these expenses are dutiable.
Sections E and F of your memorandum concern the applicant’s claims for relief under 19 U.S.C. § 1466(h)(2) and (3), respectively. On August 20, 1990, the President signed into law the Customs and Trade Act of 1990 (Pub.L. 101-382), § 484E of which amended the vessel repair statute by adding a new subsection (h). Subsection (h) included two elements, one governing foreign expenditures for LASH barges ((h)(1), herein inapplicable), the second of which ((h)(2)) is relevant to the present matter and provided as follows:
(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 the 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.
Section 1466 was subsequently amended on December 8, 1994, by § 112(b) of Pub.L. 101-465, in part by reinstatement of subsections (h)(1) and (2) which expired on December 31, 1992. The amendment, which is effective for all vessel entries made on or after January 1, 1995, also added a new subsection (h)(3) which provides as follows:
(3) the cost of spare parts necessarily installed before the first entry
into the United States, but only if duty is paid under appropriate com-
modity classifications of the Harmonized Tariff Schedule of the United
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States upon first entry into the United States of each spare part purchased
in, or imported from, a foreign country.
The scope of the amendment is narrow. It is useful to bear in mind that the limiting language of (h)(3) refers only to "spare parts", whereas subsection (a) of the statute assesses duty on a broad range of costs including "equipments, or any part thereof, including boats,...or the repair parts or materials to be used, or the expenses or repairs..." (Emphasis added). It is clear that the Congress has extended a vessel repair duty limitation under subsection (h)(3) only to certain qualifying parts.
A part under § 1466 is determined to be something which does not lose its essential character or its identity as a distinct entity but which, like materials, is incorporated into a larger whole. It would be possible to disassemble an apparatus and still be able to readily identify a part. The term part does not mean part of a vessel, which practically speaking would encompass
all elements necessary for a vessel to operate in its designed trade. Examples of parts as defined are seen in such items as piston rings and pre-formed gaskets, as opposed to gaskets which are cut at the work site from gasket material.
For purposes of § 1466, the term materials is determined to mean something which is consumed in the course of its use, and/or loses its identity as a distinct entity when incorporated into the larger whole. Some examples of materials as defined are seen in such items as a container of paint which is applied to vessel surfaces, and sheets of steel which are incorporated into the hull and superstructure of a vessel.
The term equipment is determined to mean something which constitutes an operating entity unto itself. Equipment retains at least the potential for portability. Equipment may be affixed to a vessel in a non-permanent fashion, such as by means of bolts or other temporary methods, which is a feature distinguishing it from being considered an integrated portion of the hull and superstructure of a vessel. Examples of equipment as defined are seen in such items as winches and generators.
With respect to the applicant’s claims for relief under both §§ 1466(h)(2) and (3), we are in accord with such claims with the exception of Stone Manganese Marine Limited invoice no. MEHB 5633 (listed as item (b) on p. 19 of the application) covering a propeller. This invoice covers the purchase of equipment and relief under § 1466(h)(3) is therefore denied.
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HOLDING:
The costs for which the applicant seeks relief are dutiable in part and non-dutiable in part under 19 U.S.C. § 1466 as discussed in the Law and Analysis portion of this ruling.
Sincerely,
Jerry Laderberg
Chief
Entry Procedures and Carriers Branch