VES-13-18-RR:IT:EC 114334 GEV
Chief, Liquidation Branch
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94126
RE: Vessel Repair Entry No. 110-6461890-0; PRESIDENT POLK; V-80;
19 U.S.C. 1466;
General Services; Proration; Modifications; Prefabricated
Steel; Materials
Dear Sir:
This is in response to your memorandum dated April 1, 1998,
forwarding a petition for review of our decision on an
application for relief. You request our review of the
petitioner's claims. Our findings are set forth below.
FACTS:
The PRESIDENT POLK is a U.S.-flag vessel owned and operated
by American President Lines, Ltd. Subsequent to the completion
of various foreign shipyard work, the vessel arrived at Seattle,
Washington, on May 9, 1996. A vessel repair entry was timely
filed.
An application for relief with supporting documentation was
timely filed. The applicant sought relief with respect to
numerous items listed within the above-referenced vessel repair
entry. By letter dated February 11, 1998, your office denied the
application in part and granted it in part based on Headquarters
ruling letter 114047, dated January 27, 1998, and informed the
applicant of the right to file a petition of this decision
pursuant to 4.14(d)(2) of the Customs Regulations (19 CFR
4.14(d)(2)). Subsequently, a petition was timely filed seeking
relief for the following: CF 226 Item No. 2-General Services-Proration; Item 117 (Drydocking costs); Item 501 (Corrugated
Bulkhead FR 271 Modification); Item 502 (No. 3 - Cargo Hold
Structural Modification); Item 503 (Slim-Guide Bracket
Modification); C.O. No. 1 - Bow Thruster Service Engineer; C.O.
No. 2 - No. 1 Deep Tank Modification; CF 226 Item No. 3 - Paint;
CF 226 Item No. 16 - PMC Invoice No. 95-2900-8A.
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ISSUE:
Whether the costs for which the petitioner seeks relief are
dutiable under 19 U.S.C.
1466.
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..."
With respect to the General Services and Drydocking costs
(Item No. 117) under consideration, we note that at both the
application and petition stages the evidence submitted was
insufficient to support the claim that such costs were attributed
solely to non-dutiable work. Furthermore, since the subject
entry contained both dutiable and non-dutiable costs, the General
Services and Drydocking costs at issue were prorated pursuant to
Customs ruling letter 113474 and memorandum 113350 both of which
addressed Customs implementation 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 (CAFC 1994).
Notwithstanding the petitioner's assertions to the contrary,
we maintain that the General Services and Drydocking costs in
question were correctly prorated in accordance with the above-cited authority in view of the absence of evidence substantiating
a finding that these costs were attributed solely to nondutiable
work.
Item Nos. 501, 502 and 503 are all alleged to be nondutiable
modifications to correct an original design defect on all 5 of
the C-10 class vessels. With respect to the petitioner's
allegations, we note the following.
In its application of the vessel repair statute, Customs has
held that modifications, alterations, or additions 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. (See Otte v. United States, 7 Ct.
Cust. Appls. 166, T.D. 36489 (1916); United States v. Admiral
Oriental Line et al., 18 C.C.P.A. 137, T.D. 44359 (1930); and
Customs Bulletin and Decisions, Vol. 31, Number 40, published
October 1, 1997.) The factors discussed within the
aforementioned authority 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.
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Upon further review of the record, it is evident that Item
Nos. 501 and 502 cover work performed prior to the existence of
any repairs due to bulkhead cracking or structural failure the
petitioner states would have been necessitated had this work not
been done. It is Customs position that work performed on a
vessel to correct an original design deficiency which is in
accord with the above-referenced criteria for a modification is
nondutiable so long as it is done prior to the existence of any
defect or wastage in the present installation, or repair costs
incurred as a result of such defect or wastage are segregated
from the modification costs. (Headquarters ruling letters
111884, dated March 25, 1992; 112795, dated January 5, 1994; and
226485, dated February 5, 1996) Item Nos. 501 and 502 meet the
aforementioned standards for nondutiable modifications and
therefore are accorded such treatment.
With respect to Item No. 503, however, we note that the
shipyard invoice states, "The existing brackets connecting the
stantion to the container slim-guide' fractured." (emphasis
added) Furthermore, the petitioner readily admits that, "Yes,
the failure did mandate corrective action;..." Consequently,
since there is evidence of prior wastage, the work done under
this item does not meet the requisite criteria for a modification
as discussed above. The petitioner states that the work done
under this item "...involves the addition of new previously non-existing permanently installed steel by welding." Pursuant to
the above-cited authority, the repair of this fracture by
installing a new design bracket does not remove the work in
question from consideration as a dutiable repair rather than a
modification. Item No. 503 is therefore dutiable.
CF Item No. 16 covers the supervision services of an
individual alleged to be performed in conjunction with the non-dutiable modifications referenced in Item Nos. 501 and 502. We
note, however, that the invoice covering these services (PMC
Invoice No. 95-2900-8A), merely consists of the following
statement: "Services performed by KARL MASANNECK from 1 April
1996 through 30 April 1996 in conjunction with the M/V PRESIDENT
POLK as follows:" The invoice then lists a breakdown of costs per
day, travel expenses, and a PMC fee. Nothing on the invoice
provides any nexus between the services of this individual and
Item Nos. 501 and 502. Based on the insufficiency of this
evidence, we find CF Item No. 16 to be dutiable.
C.O. No. 1 Bow Thruster Service Engineer covers the cost of
the technical services of an engineer "...to attend the MV
President Polk item #302 and 303." The petitioner contends that
these engineer services are incident to nondutiable regulatory
required inspections of the bow thruster, and that Items 302
(held to be nondutiable by Customs at the application stage) and
303 (deemed dutiable at the application stage) are nondutiable as
well. In support of this claim the petitioner relies on ABS
Rules for Building and Classing Steel Vessels (1995), 1/3.2
Drydocking Surveys, subsection 1/3.2.1(c) and Enclosure D to the
petition (a statement by the engineer who performed the services,
as well as one by the APL port engineer, that no repairs were
performed to the bow thruster during the course of these
services, only regulatory required inspections). Upon further
review of this matter, we are in accord with the petitioner. The
services of the engineer under consideration are therefore
nondutiable, as are Item Nos. 302 and 303.
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The cost for the shipyard invoice item entitled, "C.O. #2
No. 1 Deep Tank Modification" is alleged to be nondutiable either
as a modification and/or pursuant to 19 U.S.C. 1466(h)(3). In
support of the former claim, the petitioner states that: (1)
This item is entitled "No. 1 Deep Tank Modification"; (2) Hyundai
material list (Enc. D) is entitled "Modification" Internal
Member(s) at Swah Blid in No. 1 Deep tank."' and (3) All of the
previously non-existent steel shown on Enc. C is new steel
permanently installed by welding and constitutes a modification
to an existing structure to correct a C-10 class vessel initial
design defect.
With respect to the above-listed claims we note as follows.
Although this work item is entitled "No. 1 Deep Tank
Modification", the work description appearing under the title
characterizes the work as "repairs" four different times.
Furthermore, the Hyundai material list (Enc. D) actually contains
the following work description, "Modificated [sic] Internal
member in way of #1 Deep E as follows..." The document then
merely lists various articles, tests and staging costs without
providing any clarification with respect to the work involved.
As for Enc. C, the drawings thereon contain no delineation with
respect to the alleged previously non-existent steel and do not
corroborate the petitioner's statement. Consequently, the
evidence submitted is insufficient to substantiate the
petitioner's claim that this work constitutes a nondutiable
modification.
In regard to the petitioner's claim for relief pursuant to
19 U.S.C. 1466(h)(3), that statutory provision provides as
follows:
The duty imposed by section (a) of this section shall
not apply to-
...
(3) the cost of spare parts necessarily installed
before the first entry into
the United States, but only if duty is paid under
appropriate commodity
classifications of the Harmonized Tariff Schedules of
the United States
upon first entry into the United States of each such
spare part purchased
in, or imported from, a foreign country. (Emphasis
added)
For the purpose of 19 U.S.C. 1466(h), we have defined a
"part" as follows:
A part 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 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
designated 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.
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The record remains unclear as to what "spare parts" the
petitioner seeks relief for pursuant to 19 U.S.C. 1466(h)(3).
Furthermore, the petitioner has not established that the
prefabricated steel is a part under 19 U.S.C. 1466(h)(3).
Therefore, this steel is dutiable under 19 U.S.C.
1466(a).
Our determination and analysis is the same here as in
Rulings 113883, dated April 1, 1997, and 113673, dated July 7,
1997.
CF 226 Item No. 3 covers paint listed on the following three
IPC invoices: (1) Invoice no. 044283; (2) Invoice No. 036974; and
(3) 046136. With respect to the latter, the petitioner readily
concedes that the paint listed thereon is dutiable under the
vessel repair statute.
In regard to IP Invoice no. 044283, the petitioner states
that "[s]ince this material was necessarily installed' by the
vessel crew, it should be exempt from duty under 19 USC 1466 (A)
and qualifies for GATT duty under 19 USC 1466 (h) (2)." (Emphasis
added) This statement is contradictory since the words
"necessarily installed" are set forth in 1466(h)(3), discussed
above, not 1466(h)(2) cited by the petitioner. Further in this
regard, it should be noted that
1466(h)(3) is a claim for relief which is available only to
parts, not materials such as paint. Relief is available for
paint under 1466(h)(2), provided the requisite criteria are
met. That statutory provision is set forth below:
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 clas-
sifications 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, or
19 U.S.C. 1466(h)(2) contemplates entry of the pertinent
part or material, and the payment of duty under the appropriate
commodity classification of the HTSUS, prior to the use of the
pertinent part or material in the foreign shipyard. That is not
what occurred with respect to the paint listed on IPC invoice no.
044283 which was purchased in Korea and shipped to the subject
vessel in that country where it was used. Consequently, the
paint listed on this invoice is dutiable.
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In regard to IPC invoice 036974, we note that while
1466(h)(2) applies by its terms only to foreign-made imported
parts or materials, there was ample reason to extend its effect
to U.S.-made parts or materials as well. To fail to do so would
act to discourage the use of U.S.-made parts or materials in
effecting foreign repairs since continued linkage of remission
provisions of subsection 1466(d)(2) with the assessment
provisions of subsection (a) of 1466 would obligate operators
to pay duty on such materials unless they were installed by crew
or resident labor. Consequently, Customs so extended the duty-free treatment of subsection (h) to U.S.-manufactured parts or
materials (See, e.g., Customs ruling letter 110980, dated April
16, 1991) In this regard, we note that the petitioner has
submitted a statement from the U.S. manufacturer of the paint
listed on IPC invoice no. 036974 that it was manufactured in the
United States. Accordingly, the petitioner's claim for relief
for the paint covered by this invoice is granted.
HOLDING:
As detailed above, the petition is granted in part and
denied in part.
Sincerely,
Jerry Laderberg
Chief
Entry Procedures and Carriers
Branch