VES-13-18 CO:R:IT:C 110845 BEW
Deputy Assistant Regional Commissioner
Commercial Operations Division
ATTN: Regional Vessel Repair Liquidation Unit
New Orleans, Louisiana 70130
RE: Petition for Review on New Orleans Vessel Repair Entry No.
C20-00180066 dated November 11, 1988, vessel KITTANNING,
Voyage 172. Casualty; latent defect; owner-supplied spare
parts
Dear Sir:
This is in reference to memoranda dated February 8 and
June 18, 1990, from your office which forwards a petition for
relief filed by Chestnut Shipping Company, on a partial denial of
an application for relief for duties assessed on repairs made to
the vessel KITTANNING.
FACTS:
The petitioner's request for review centers on the cost for
damage to the L.P. Turbine and to the rudder and rudder stock
alleged to be caused by a "casualty" suffered by the vessel while
enroute from Spain to Scotland.
In a decision dated December 26, 1989, Customs ruled that:
(W)ithout some evidence of an occurrence such as fire,
storm, explosion, or the like, it cannot be established
that a vessel has suffered a casualty-related loss.
There must be a showing of some identifiable extrinsic
force which causes the damage. In light of this
finding, the entirety of the following invoices is
considered dutiable:
1. Lisnave #0486/86/LISN, $267,540.00
2. Lisnave #0487/89/LISN, $12,800.00
3. ABS #NC08348, $4,592.32
Additionally, only portions of two other invoices related to
this same incident are considered duty-free:
1. Marcom Engineering #E227089, dutiable except for the
segregated costs for transportation and equipment
rental.
2. General Electric #AL2422241, dutiable because the
U.S.-resident labor detailed in the invoice was for
installation of foreign materials. Under 1466(d)(2),
both U.S. labor and materials must be used. The
segregated travel and subsistence charges for resident
labor as reflected on G.E. invoice AL2422135 are,
however, considered duty-free.
Under authority of the George Hall Coal Co. case,
supra., the entirety of Lisnave #485/89/LISN, entitled
"General Expenses" ($192,280.00), is duty-free. The line
items described in the invoice all concern drydocking and
closely related expenses of the type covered by the holding
of the Court.
The last invoice for which relief is sought, Lisnave
#0488/89/LISN, contains both dutiable and non-dutiable
expenses. Most of the items for which relief is sought are
duty-free inspection items with which no repairs are
associated, and one (item 3P) concerns the provision of
plastic deck coverings during pendency of drydock work (free
under the George Hall Coal Co. rationale). Those items
which we find dutiable for the reason that they are
associated with repairs, are:
1. #22 (repair of pipe sections).
2. #26 (repair to globe valve).
3. #29 (repairs to door frames and studs).
4. #47 (renewal of wasted steel plates-see
specifications).
5. #152 (brazing and readjustment).
6. #'s 156 and 163 (no specifications or other evidence
showing that these operations were limited to
testing and inspection).
Lastly, no relief was requested regarding several
survey reports. We have reviewed these documents and find
them related to operations previously held to be dutiable.
Their costs are, therefore, dutiable as part of the
previously considered operations. The reports in question
are identified as:
1. ABS "Drydocking survey and side shell repairs."
2. ABS "Tank repairs".
3. ABS "Deck penetration for new heating coils."
4. ABS "Rudder and rudder stock damage and repairs
survey."
5. ABS "low pressure main turbine damage and repairs
survey."
6. The Salvage Association "Casualty: L.P.
Turbine...Rudder Stock."
The petitioner has submitted additional evidence and an
explanation of the survey previously filed to show that the
damage to the L.P. turbine and the rudder and rudder stock was
caused by latent defects in certain parts of the turbine and the
rudder.
In addition, the petitioner has submitted documentation and
invoices relating to cost of certain foreign repairs which were
not reported or declared on the Customs Form 226 at the time of
entry of the vessel.
ISSUES:
1. Whether sufficient evidence is presented to establish
that the subject repairs were necessitated by a
"casualty" which is remissible under the vessel repair
statute (19 U.S.C. 1466).
2. Whether "latent defects" will excuse duty under the
repair statute (19 U.S.C. 1466)
LAW AND ANALYSIS:
Title 19, United States Code, section 1466(a), 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 the foreign or
coastwise trade, or vessels intended to be employed in such
trade.
Paragraph (1), subsection (d) of section 1466 provides that
duty may also be remitted if good and sufficient evidence is
furnished establishing that the vessel was compelled by stress of
weather or other casualty to put into a foreign port to make
repairs to secure the safety and seaworthiness of the vessel to
enable her to reach her port of destination. It is Customs
position that "port of destination" means a port in the United
States."
The statute thus sets a three-part test which must be met in
order to qualify for remission under the subsection, these being:
1. The establishment of a casualty occurrence.
2. The establishment of unsafe and unseaworthy conditions.
3. The inability to reach the port of destination without
obtaining foreign repairs.
The term "casualty" as it is used in the statute, has been
interpreted as something which, like stress of weather, comes
with unexpected force or violence, such as fire, explosion, or
collision (Dollar Steamship Lines, Inc. v. United States, 5 Cust.
Ct. 28-29, C.D. 362 (1940)). In this sense, a "casualty" arises
from an identifiable event of some sort. In the absence of
evidence of such a casualty event, we must consider the repair to
have been necessitated by normal wear and tear (ruling letter
106159, September 8, 1983).
With regard to the allegation relating to "latent defects".
It is the intention of the Congress, as reflected in the record
of hearings concerning amendments to sections 3114 and 3115 of
the Revised Statutes of the United States (the predecessor
provisions to 19 U.S.C. 1466(a) and (d)), that the statute not
recognize latent defects. At that time, the House of
Representatives and the Senate were considering different
amendatory language. The following is recorded in regard to the
latent defect issue:
[Senator] Barkley. In other words, as I understand the
Senator, according to the House provision if some portion of
the ship on the voyage over wears out or a defect is
disclosed prior to the sailing of the ship from the home
port, that repair may be made in a foreign port without
paying the 50 percent tax?
[Senator] Fletcher. Yes.
[Senator] Barkley. But under the Senate committee
amendment, no such circumstances could exist. The only
repairs that could be exempted from payment of a 50 percent
tax are repairs made necessary by reason of stress of storm
or weather. In other words ... she can not repair any
ordinary wear and tear of machinery or appliances that
could not have been reasonably discovered prior to the
sailing of the vessel ....
[Senator] Fletcher. That is exactly what it means.
(Congressional Record, September 19, 1929, p. 3782)
The quoted legislative history amply demonstrates that latent
defect will not excuse duty under the statute. The Senate
version was, of course, the version which was adopted and is
incorporated in the present statute.
With regard to the claim of latent defect, the petitioner
states that they understand that latent defects in the
manufacture of the vessel or its parts do constitute "other
casualties" within the meaning of section 1466(d)(1) and the
repairs necessitated by such defects are remissible in C.S.D. 82-
120.
Customs Service Decision 82-120 holds that the latent defect
of a part and damage caused by officer negligence which lead to
foreign repairs of a vessel are remissible as casualties under 19
U.S.C. 1466(d)(1).
After a complete review of the record, we find no evidence
sufficient to substantiate that the damage was caused by officer
negligence. Accordingly, the petition is denied.
As a result of research stemming from an inquiry by your
office, the petitioner in a letter dated June 14, 1990, informed
Customs that in searching its files for documentation needed to
substantiate its allegation relating to the casualty, that it
located a group of invoices that contained cost for repairs which
had not been declared and entered with duty paid pursuant to
section 4.14(b)(1) and (2), Customs Regulations (promulgated
pursuant to 19 U.S.C. 1466). These costs total $176,295.70.
The petitioner further contends that some of the items were
not received until after the entry had been filed, and that due
to a departure and shift in personnel handling these materials
these items were placed in the files without full review.
It is Customs position that when an entry has not been
liquidated, foreign costs and expenses which are previously
unreported and subsequently disclosed to Customs may be accepted
with a letter of explanation and added to the originally
submitted documentary evidence. At the time of liquidation the
duty for these additional costs should also be billed. Please
keep us advised as top the progress of the penalty case.
With regard to the items of cost relating to these invoices,
we find as follows:
The Customs and Trade Act of 1990 (Pub. L. 101-382) which
amends 19 U.S.C. 1466, exempts from duty under the statute, the
cost of spare repair parts or materials which have been
previously imported into the United States as commodities with
applicable duty paid under the Harmonized Tariff Schedule of the
United States. The amendment specifies that the owner or master
must provide a certification that the materials were imported
with the intent that they be installed on a cargo vessel
documented for and engaged in the foreign or coasting trade.
The certification required by 19 U.S.C. 1466(h)(2) as to the
vessel's documentation (foreign or coasting trades) and service,
will be made by the master on the vessel repair entry (CF 226)
at the time of arrival. The fact of payment of duty under the
HTSUS for a particular part must be evidenced as follows. 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 CF 226. In
cases in which the vessel operator has purchased imported
materials from a third party in the United States, a bill of sale
for the materials shall constitute sufficient proof of prior
importation and HTSUS duty payment. This evidence of proof of
importation and payment of duty must be presented to escape duty
and any other applicable consequences.
In addition, we require certification on the CF 226 or an
accompanying document by a person with direct knowledge of the
fact that an article was imported for the purpose of either then-
existing or intended future installation on a company's vessels.
Ordinarily, the vessel's master would not have direct knowledge
of that fact, and an agent may also be without such knowledge.
Customs has in the past linked this duty remission
provision to the duty assessment provision in subsection (a) of
the statute. In the face of argument to the contrary we have
held that a two-part test must be met in order for remission of
duty to be granted: first, that the article must be of U.S.
manufacture; and, second, it must be installed by a U.S.-resident
or regular vessel crew labor. The reason for this position is
that (d)(2) refers to "such equipments or parts...", etc.,
without any other logical placement for the word "such" occurring
in that subsection. We inferred that "such" articles must refer
to those installed under subsection (a), absent any other
reasonable predication. The new amendment puts this issue to
rest; it is clear that as concerns foreign-made parts imported
for consumption and then installed on U.S. vessels abroad, the
labor required for their installation is separately dutiable. A
part may now be considered exempt from vessel repair duty albeit
the foreign cost labor is dutiable.
Uniform treatment will be accorded to parts sent from the
United States for use in vessel repairs abroad, regardless of
whether they are proven to be produced in the U.S., or have been
proven to have been imported and entered for consumption with
duty paid. In both cases, the cost of the materials is duty
exempt and only the cost of foreign labor necessary to install
them is subject to duty. Crew member or U.S.-resident labor
continues to be free of duty when warranted.
The effective date of this amendment makes this section
applicable to any entry made before the date of enactment of this
Act that is not liquidated on the date of enactment of this Act,
and any entry made--
(A) on or after the date of enactment of this
Act, and
(B) on or before December 31, 1992.
Since the subject entry has not been liquidated, the new
section 1466(h) is applicable to this entry as it relates to
spare parts.
With regard to the invoices listed in Parts B through D and
F submitted with the June 14, 1990, letter of explanation, the
owner supplied materials and spare parts costs, with the
exceptions of travel expenses, freight charges and ship's stores,
listed on the subject invoices are dutiable, subject to the
submission of proof of U.S. manufacture or previous duty-paid
importation with intended use on a vessel (1466(h)). All of the
costs related to the invoices listed in Part E are dutiable.
HOLDING:
The evidence presented is insufficient to prove that the
foreign repairs performed on the subject vessel were necessitated
by a casualty occurrence, thus warranting remission pursuant to
19 U.S.C. 1466.
Damage due to latent defect is not excused under the
statute. Based on the foregoing, the petition is denied as set
forth above.
Following a thorough review of the law and analysis of the
evidence, we find that the relief requested as to Parts B through
F should be allowed in part and denied in part as set forth in
the LAW AND ANALYSIS section of this ruling. The petitioner
should be informed of the right to provide additional evidence as
required.
Sincerely,
Stuart P. Seidel
Director, International Trade
Compliance Division