VES-13-18-CO:R:P:C 111230 GV
Deputy Assistant Regional Commissioner
Classification and Value Division
ATTN: Regional Vessel Repair Liquidation Unit
6 World Trade Center
New York, New York 10048-002980
RE: Protest No. 1001-0-001426; EXXON SAN FRANCISCO
Dear Sir:
Your memorandum dated July 31, 1990, forwarded a protest
regarding vessel repair entry no. 1001-86-446013-2. Our findings
are set forth below.
FACTS:
The EXXON SAN FRANCISCO is a U.S.-flag vessel owned by Exxon
Shipping Company ("Exxon") of Houston, Texas. The subject vessel
had shipyard work performed on her in Arno shipyard in Brest,
France, during the period of June 12, 1986 through July 14, 1986.
Subsequent to the completion of this work the vessel arrived in
the United States in New York, N.Y. on July 28, 1986.
A vessel repair entry was filed on September 12, 1986. An
application for relief, dated October 23, 1986, was filed
requesting relief from certain vessel repair duties. Pursuant to
several telephone conversations between counsel for Exxon and
Customs New York Vessel Repair Liquidation Unit (VRLU), a revised
application for relief, dated January 13, 1987, was submitted
containing revised invoices, additional claims for relief, and
additional supporting evidence. By letter dated June 12, 1987,
the New York VRLU advised Exxon that their application had been
forwarded to the Carrier Rulings Branch, Customs Headquarters,
for review. By memorandum dated November 23, 1987 (VES-13-18-
CO:R:P:C 109005 LLB) the Chief, Carrier Rulings Branch granted
the application in part and denied it in part. This memorandum
was transmitted to Exxon from the New York VRLU by letter dated
December 16, 1987, wherein Exxon was advised of its right to file
a petition for review of the decision within 30 days of its
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written notice of Customs decision (i.e., until January 15, 1988)
or the entry would be liquidated based on the November 23, 1987
memorandum. On January 12, 1988, Exxon notified Customs that it
would not file a petition.
By letter dated January 22, 1988, and subsequent letters
dated May 10 and May 30, 1988, Customs requested that Exxon
provide additional documentation regarding a variety of parts and
materials listed on the shipyard invoices and claimed to be
"owner furnished," "owner supplied," "vessel furnished," etc. In
response to these requests Exxon, by letters dated April 15,
1988, and February 7, 1989, provided invoices, purchases orders,
and additional documentation to support their claim that the
parts and materials in question were U.S.-manufactured and
purchased.
The entry was liquidated on November 13, 1989. On February
9, 1990, a timely protest was filed claiming the following: (1)
the costs of U.S.-manufactured and purchased materials are
nondutiable; (2) cleaning operations and thickness gauging are
nondutiable; (3) the reduction of overall foreign costs by
$40,000 due to a penalty provision in the repair contract
requires concomitant apportioned reduction of vessel repair
duties assessed thereon; and (4) the installation of tank access
ladders and the delivery of steel claimed to be constructed into
a swimming pool on board the subject vessel after its departure
from the foreign shipyard constitute nondutiable modifications.
ISSUES:
1. Whether evidence is presented sufficient to prove that
the parts and materials for which the protestant seeks relief
were U.S.-manufactured and therefore nondutiable under 19 U.S.C.
1466.
2. Whether evidence is presented sufficient to prove that
the cleaning operations and thickness gauging for which the
protestant seeks relief are nondutiable costs under 19 U.S.C.
1466.
3. Whether the reduction in the total cost of the repairs
pursuant to a penalty provision in the repair contract results in
an apportioned reduction of vessel repair duties assessed
pursuant to 19 U.S.C. 1466.
4. Whether evidence is presented sufficient to prove that
the installation of tank access ladders and the delivery of steel
claimed to be constructed into a swimming pool on board the
subject vessel after it departed the foreign shipyard constitute
modifications so as to render the costs thereof nondutiable under
19 U.S.C. 1466.
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LAW AND ANALYSIS:
Title 19, United States Code, section 1466, provides in
pertinent part for the 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.
In regard to the applicant's first claim for relief, we
note that in response to requests for advice regarding the
dutiability under section of 1466 of equipments, parts, repair
materials, etc., which have been manufactured and purchased in
the United States for installation abroad on U.S.-documented
vessels, Customs, by memorandum dated April 19, 1989, and
published in the Customs Bulletin of May 10, 1989, held that the
use of foreign labor to install U.S. parts subjects both the
parts and labor to duty. The memorandum further held that the
installation of such parts by U.S. residents or regular crew
labor warrants remission pursuant to section 1466(d)(2).
Upon further review of this matter, however, it appears that
the implementation of Customs policy as set forth in the May 10,
1989, Customs Bulletin should have been preceded by the
publication of a notice in the Federal Register soliciting
comments from interested parties. Accordingly, until such time
as said notice is published, Customs will uphold its position as
delineated in T.D. 75-257, which held that where equipment,
parts, repair materials, etc., which have been manufactured and
purchased in the United States are installed abroad on U.S.-
documented vessels by other than U.S. residents or regular crew,
only the labor alone is dutiable. If the installation of such
articles is performed by U.S. residents or the regular crew,
remission is warranted pursuant to section 1466(d)(2).
In our adherence to the policy set forth in T.D. 75-257,
however, it has come to our attention that affidavits and/or
other documentation have been submitted which misrepresent the
place of manufacture of the articles in question. Inasmuch as we
have come to learn of this misrepresentation, it is our policy to
require evidence beyond an affidavit from an interested party to
establish U.S. manufacture and U.S. purchase. Therefore, we
require direct evidence of U.S. manufacture (e.g., an affidavit
by the equipment manufacturer) as well as U.S. purchase for
relief to be granted.
In the protest currently under consideration, the protestant
has submitted invoices, purchase orders, and shipping releases.
While it is apparent that this documentation is sufficient proof
of U.S. purchase, it is insufficient for purposes of proving U.S.
manufacture. Accordingly, absent the requisite evidence the
protestant's claim with respect to these parts and materials is
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denied. However, we will delay the final consideration of this
protest for a period of 60 days from the date Exxon is notified
of our decision by the New York VRLU so that direct evidence of
U.S. manufacture may be submitted.
In regard to the protestant's second claim for relief (i.e.,
the thickness gauging in Item 37, and the cleaning in Items 96
and 97 of the Arno invoice are nondutiable), we note the
following.
The protestant contends that the thickness gauging covered
by Item 37 is related to a nondutiable survey (see Exhibit G of
the protest) which Customs found to be dutiable in its November
23, 1987, ruling. Although Exxon does not specifically challenge
Customs finding with respect to the dutiability of the survey
(its cost was not segregated on the ABS invoice from an
unquestionably dutiable hull repairs survey) it is claimed that
the cost of thickness gauging in Item 37 is nondutiable. The
protestant cites item 17 on page 3 of the ABS report where
thickness gauging appears under the heading "Continuation of
Special Survey Hull No. 3." The thickness gauging listed
thereunder took place at ballast tank nos. 3 and 7, center tank
nos. 2 and 4, "Internals in forepeak as deemed necessary," and
"Suspect areas throughout the vessel." Upon further review of
this survey, we note that items 19.7 (No. 3 Port Ballast Tank),
19.8 (No. 3 Starboard Ballast Tank), and 19.9 (No. 4 Center Cargo
Tank) all contain the statement, "Minor fractures in scattered
locations veed out and rewelded." In addition, items 19.16 (No.
7 Port and Starboard Ballast Tanks) and 19.17 (Forepeak Tank)
reference numerous repairs.
Accordingly, notwithstanding the issue of the dutiability of
the survey in question (which we maintain is dutiable), it is
apparent that the cost of thickness gauging in Item 37 of the
Arno invoice is related to dutiable repair work and therefore
remains dutiable.
In regard to the cleaning costs under dispute, we note that
notwithstanding the fact that the issue of dutiability of
cleaning costs is currently pending before the U.S. Court of
International Trade (see Texaco Marine Services, Inc. and Texaco
Refining and Marketing, Inc., v. United States, Court No. 89-12-
0062), Customs has long held that cleaning is not dutiable unless
it is performed as part of, in preparation for, or in conjunction
with dutiable repairs (which includes coating/painting) or is an
integral part of the overall maintenance of the vessel; see
C.I.E.'s 18/48, 125/48, 910/59, 820/60, 51/61, 429/61, 569/62,
698/62, C.D. 2514, T.D.'s 45001 and 49531.
Item 96 (Boiler Water Side Cleaning and Repairs) is conceded
by the protestant to cover dutiable repairs (i.e., repair casing
leaks, renewals, etc.), however, the protestant claims that the
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cleaning costs listed under the same item number are nondutiable
because they were not done in preparation for, or as a result of,
the repair work, and were segregated from the dutiable repair
costs. We do not agree. The mere fact that otherwise related
costs are itemized separately does not in and of itself preclude
the assessment of duty. Furthermore, a review of the invoice
provides no indication that the cleaning was unrelated to the
repairs, a burden of proof which must be met by the protestant to
prove nondutiability. Accordingly, absent evidence to the
contrary, all costs listed under Item 96 remain dutiable.
Item 97 (Fire Side Cleaning - Main Boiler) is claimed by the
protestant to be strictly cleaning unrelated to dutiable repairs.
Upon reviewing this item, we note that the only reference to
repairs appears in subsection F which states "NOTE: A separate
item will be written to cover repairs dealing with leaks." The
record is devoid of any such separate item. Accordingly, we are
of the opinion that the cost of cleaning in Item 97 is
nondutiable.
In regard to the protestant's third claim for relief (i.e.,
the contract penalty reduction) Customs recognizes such discounts
provided they are acknowledged through documentation by the
foreign shipyard (see C.I.E. 227/63). Although such an
acknowledgement appears on the last page of the shipyard invoice
the discounted amount was calculated from the total amount of the
invoice instead of from each individual item. In view of the
fact that this invoice contains both dutiable and nondutiable
work, the discount is not properly apportioned between such work.
Accordingly, the $40,000 shipyard discount is only to be
considered as apportioned between the dutiable and nondutiable
costs.
In regard to the protestant's fourth and final claim for
relief (that the steel supply listed in Item 205 and the cargo
and ballast tank access ladders listed in Item 55 (see Appendix K
of the application and Appendix U of the revised application)
constitute nondutiable modifications) we note the following.
A leading case in the interpretation and application of
section 1466 is United States v. Admiral Oriental Line et al., 18
C.C.P.A. 137 (T.D. 44359 (1930)). That case distinguished
between equipment and repairs on one hand and permanent additions
to the hull and fittings on the other, the former being subject
to duty under section 1466.
The Court in Admiral Oriental, supra., cited with approval
an opinion of the Attorney General (27 Op. Atty. Gen. 288). That
opinion interpreted section 17 of the Act of June 26, 1884, (23
Stat. 57, which allowed drawback on the vessels built in the U.S.
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for foreign account, wholly or in part of duty-paid materials.
In defining equipment of a vessel, the Attorney General found
that items which are not equipment are:
...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...
[and] are material[s] used in the construction of
the vessel...
While the opinion of the Attorney General interpreted a provision
of law other than section 1466 or a predecessor thereto, it is
considered instructive and has long been cited in Customs Service
rulings as defining permanent additions to the hull and fittings
of a vessel.
For purposes of section 1466, dutiable equipment has been
defined as:
...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 (1914)).
It should be noted that the fact that a change or addition
of equipment is made to conform with a new design scheme, or for
the purpose of complying with the requirements of statute or
code, is not a relevant consideration. Therefore, any change
accomplished solely for these reasons, and which does not
constitute a permanent addition to the hull and fittings to the
vessel, would be dutiable under section 1466.
In regard to the cargo and ballast tank access ladders, we
agree that they constitute nondutiable modifications to the
subject vessel. However, we do not reach the same conclusion
with respect to Item 205. The protestant concedes the shipyard
invoice merely shows that a large quantity of steel was supplied,
uninstalled. It is claimed, however, that the vessel's crew used
this steel to construct a swimming pool on board after departing
France on July 14, 1986. The record contains no evidence to
support this finding. Accordingly, Item 205 remains dutiable.
HOLDINGS:
1. The evidence presented is insufficient to prove that the
parts and materials for which the protestant seeks relief were
U.S.-manufactured and therefore nondutiable under 19 U.S.C. 1466.
However, we will delay final liquidation of this entry for a
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period of 60 days from the date of notification by the New York
VRLU to the protestant so that direct evidence of U.S.
manufacture may be provided.
2. The evidence presented is insufficient to prove that the
cleaning operations in Item 96 and thickness gauging costs for
which the protestant seeks relief are nondutiable under 19 U.S.C.
1466 in view of the fact that such costs were incurred in
conjunction with dutiable repairs.
3. The reduction in the total cost of repairs pursuant to a
penalty provision in the repair contract results in a reduction
of vessel repair duties assessed pursuant to 19 U.S.C. 1466
apportioned between those costs which are dutiable and those
costs which are nondutiable.
4. The evidence presented is sufficient to prove that the
installation of tank access ladders is a modification and
therefore nondutiable under 19 U.S.C. 1466. However, the
evidence presented is insufficient to prove that the steel in
Item 205 delivered to the vessel was constructed into a swimming
pool by the vessel's crew so as to constitute a nondutiable
modification under 19 U.S.C. 1466.
Accordingly, the protest is granted in part and denied in
part.
Sincerely,
Stuart P. Seidel
Director, Regulatory Procedures
and Penalties Division