VES-13-18 CO:R:IT:C 112507 JBW
Deputy Regional Director
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831
RE: Vessel Repair; Transportation; Segregated Invoice Costs;
Survey; Modification; Cleaning; 19 U.S.C. 1466; SEA-LAND
DISCOVERY, v-41; Entry No. 110-0104186-9; Petition for Review.
Dear Sir:
This letter is in response to your memorandum that forwards for
our review the petition for review filed in conjunction with the
above-referenced vessel repair entry.
FACTS:
The record reflects that the subject vessel, the SEA-LAND
DISCOVERY, arrived at the port of Tacoma, Washington, on August 19,
1991. Vessel repair entry, number 110-0104186-9, was filed on
August 23, 1991. The entry indicates that the vessel underwent
extensive foreign shipyard work. An application for relief was
filed and was allowed in part and denied in part. Headquarters
Ruling Letter 112211, dated July 6, 1992. The petitioner now seeks
relief from duty for certain costs found to be dutiable in the
application.
ISSUE:
Whether the foreign work performed on the subject vessel for
which the petitioner seeks relief is dutiable under 19 U.S.C. 1466.
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.
I. UNITED STATES PARTS
The vessel repair statute exempts from duty spare repair parts
or materials that have been manufactured in the United States or
entered the United States duty-paid and are used aboard a cargo
vessel engaged in foreign or coasting trade. 19 U.S.C. 1466(h).
For purposes of this section, where a part is purchased from a party
unrelated to the vessel owner, a United States bill of sale
constitutes sufficient evidence to demonstrate that the part was
either manufactured in the United States or entered in the United
States, duty-paid. 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
Customs Form 226.
The petitioner's claim for relief for parts that it asserts
were manufactured in the United States was denied in the application
for failing to provide evidence to establish the country of
manufacture (Item 100). With regard to the six inch globe valve,
the petitioner now submits a United States bill of sale to establish
United States manufacture. This part had been used on and removed
from another vessel and subsequently returned to the United States
for repair by the manufacturer. Following repair, the part was sent
to the SEA-LAND DISCOVERY for installation. The documentation
submitted that establishes the manufacture and repair of the part in
the United States is sufficient to meet the exemption provided under
19 U.S.C. 1466(h). The cost of this part is therefore not subject
to duty.
Two other parts appear on Invoice Item 100 that the petitioner
claims were manufactured in the United States. The petitioner
submits a United States bill of sale (AMS Invoice 3335). The cost
of these parts is likewise not subject to vessel repair duty.
II. WORK PERFORMED IN THE UNITED STATES
Claims for relief for two items, 105 and 140, were denied in
the application as foreign charges. The statute assesses duty on
the cost of foreign repairs. The evidence submitted as part of the
petition establishes that the work was in fact performed in the
United States. The cost of these items is therefore not subject to
duty.
III. INSPECTION AND SURVEYS
The petitioner seeks relief for numerous items that it
identifies as non-dutiable surveys. The Customs Service has held
that where periodic surveys are undertaken to meet the specific
requirements of a governmental entity, a classification society, or
insurance carrier, the cost of the surveys is not dutiable even when
dutiable repairs are effected as a result thereof. Headquarters
Ruling Letter 110368, dated July 26, 1989. In a recent case, we
emphasized that this interpretation exempts from duty only the cost
of a required scheduled inspection by a qualifying entity.
Headquarters Ruling Letter 111328, dated August 7, 1991. If,
however, the survey is to ascertain the extent of damage sustained
or whether repairs are deemed necessary, then the costs are dutiable
as part of the repairs that are accomplished. C.I.E. 429/61; C.S.D.
79-2, 13 Cust. B. & Dec. 993 (1979); C.S.D. 79-277, 13 Cust. B. &
Dec. 1395, 1396 (1979). In the liquidation process, Customs should
look beyond the mere labels of "continuous" or "ongoing" before
deciding whether the item is dutiable. If an inspection or a survey
is conducted as a part of a maintenance and repair program labelled
"continuous" or "ongoing," the cost of such survey is dutiable if it
is in fact repair related.
Under this authority, we find the following items to be
required surveys that are not subject to duty:
Item 180-4.1002 D.C. Heater Mounts
Item 202 DI-6903 Drydock Survey
Item 202 DI-6902 Tailshaft Survey
Item 202 DI-0176 Annual Hull/Machinery
Item 202 DI-0176 Intermediate Survey
Item 202 DI-0176 Year of Grace Survey
Item 202 DI-6903 Special Hull Survey No. 5
Item 202 DI-0176 Annual Preventative Maintenance
Item 202 SG-71634-H Special Cont. Sur. of Machinery
and Electrical Equipment
Item 161 represents charges for the inspection services of a
marine engineer as required by the petitioner's insurance carrier.
As such, the inspection is a required inspection, the cost of which
is not subject to duty under 19 U.S.C. 1466.
Item 180-4.1022 reflects costs for the opening and removal of
tube bundles from the main lube oil coolers. This item was
originally held dutiable for failure to segregate the cost of
renewal of engineering zincs from the non-dutiable inspection costs.
The petitioner has now submitted a segregated invoice. The
inspection related costs appearing under this item are not subject
to duty.
Item 180-5.2155 represents charges for x-rays that were
required by the American Bureau of Shipping inspector for the
special hull survey. No repairs were made. This cost is associated
with a required survey and is therefore not subject to duty.
Item 202 DI-0176, Modification Survey, does not appear to be a
required survey. It is, however, not subject to duty as part of the
modifications performed.
The Petitioner also seeks relief for the cost of certain
inspections where no repairs resulted from the inspections. In some
instances, gaskets, seals, or other packing materials were destroyed
when areas were opened for inspection. The Customs Service has held
that inspections not resulting in repairs are not dutiable.
Headquarters Ruling Letter 110395, dated September 7, 1989; see
American Viking Corp. v. United States, 37 Cust. Ct. 237, 247, C.D.
1830 (1956). Further, the Customs Service has held that articles
necessarily destroyed in the course of opening an area for
inspection may be replaced without duty consequences. Headquarters
Ruling Letter 109349, dated July 15, 1988; American Viking Corp., 37
Cust. Ct. at 247.
The following items were identified as parts destroyed to
permit inspection and are not subject to duty:
Item 180-4.1006 H/P Turbine Gasket
Item 180-4.1007 L/P Turbine Gasket
Item 180-4.1019 P/S Boiler Mounting
Item 180-5.2009 No. 1 & 2 Fuel Oil Heaters
Item 256-2.1013 Prop., Outer Seal & T/Shft Ex.
Item 256-2.10132 Reassembled Seal Assembly
Item 273 DI-6905 Seal Servicing
IV. MODIFICATIONS
In its application of the vessel repair statute, the Customs
Service has held that modifications to the hull and fittings of a
vessel are not subject to vessel repair duties. Over the course of
years, the identification of modification processes 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 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 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 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.
The Customs Service has held that the decision in each case as
to whether an installation constitutes a nondutiable addition to the
hull and fittings of the vessel depends to a great extent on the
detail and accuracy of the drawings and invoice descriptions of the
actual work performed. Even if an article is considered to be part
of the hull and fittings of a vessel, the repair of that article, or
the replacement of a worn part of the hull and fittings, is subject
to vessel repair duties.
After reviewing the evidence regarding the specific items
submitted for our consideration, we find that the following items
are modifications that are not subject to duty:
Item 180-5.1050 Main Deck Bunker and Shore Service
Item 180-5.2005 Reserve Feed Tanks
Item 180-Deep 5 Tank Modification
Item 180-CD New New Cofferdam
V. CLEANING
The petitioner seeks relief for the cleaning of the fuel oil
tanks. The Customs Service has held that cleaning is not dutiable
unless it is performed as part of, in preparation for, or in
conjunction with dutiable repairs or is an integral part of the
overall maintenance of the vessel. E.g., Headquarters Ruling Letter
110841, dated May 29, 1990 (and cases cited therein). The
petitioner acknowledges that the following tank cleanings were in
preparation for repairs. The costs appearing under these items are
subject to duty:
Item 193 D1-0156 Item 198 D1-0164
Item 224 D1-0211 Item 236 D1-0226
Item 256 D1-6833
The costs appearing under Item 181 D1-0113 and Item 188 D1-
0131 represent costs for cleaning the fuel oil tanks for inspection.
As noted in the previous paragraph, these tanks underwent further
cleaning for repair. In discussing the dutiability of inspection
costs, we stated that only the cost of a required inspection is
exempt from duty. Where dutiable repairs follow such inspections,
the costs that would have been incurred to effect the repairs
notwithstanding the inspection are subject to duty. The costs
incurred to prepare the fuel oil tanks for inspection were necessary
both to allow the inspection and to carry out the repairs. The
costs appearing under Item 181 D1-0113 and Item 188 D1-0131 are
consequently subject to duty.
VI. SEGREGATION OF TRANSPORTATION CHARGES
In ruling on the application, we determined that certain non-
dutiable transportation charges were subject to duty because they
were not properly segregated from other dutiable charges. The
petitioner has now filed amended invoices that breakout the
transportation charges. We conclude that the following costs are
not subject to duty:
Item 274-5.10182 Item 180-5.10182
Item 174-5.10192 Item 180-5.10191 ($550 not dutiable)
Item 256-2.1015
The following items represent costs that the petitioner
acknowledges are subject to duty:
Item 274-5.10181 Item 180-5.10181
Item 174-5.10191 Item 180-5.10191 ($4,550 dutiable)
Item 256-2.10133
VII. CONSUMABLE SUPPLY
The petitioner seeks relief for the purchase of de-ionized
water used when initially lighting the boilers after the drydocking
and for human consumption. After the vessel is underway, it can
make its own distilled water.
"Consumable supplies" are generally defined as supplies for the
consumption, sustenance, and medical needs of the crew and
passengers during a voyage. C.I.E. 1759/56. Consumable supplies
generally are not subject to vessel repair duty unless used in
effecting dutiable repairs. C.I.E. 196/60. The water under
consideration was not used in effecting repairs; rather, the water
is used only to permit the vessel to regenerate power to permit the
vessel to get underway. Such use qualifies the water as a
consumable supply. The cost of the water is therefore not subject
to duty.
HOLDING:
Following a thorough review of the facts in this case as well
as an analysis of the law and applicable precedents that bear upon
those facts, we have determined that the Petition for Review should
be granted in part and denied in part for the reasons set forth in
the Law and Analysis section of this ruling. The petitioner should
be informed of the right to file a Protest following liquidation of
this entry, as evidenced by the posting of the bulletin notice of
liquidation.
Sincerely,
Stuart P. Seidel
Director, International Trade