VES-13-18 CO:R:IT:C 112756 BEW
Regional Director, Commercial Operations
U.S. Customs Service
South Central Region
New Orleans, Louisiana 70130
RE: Vessel Repair Entry No. VR-C53-0020954-7, S/S MONTRACHET,
Voyage 185, Modifications; drydocking; accessing; gauging;
inspection and cleaning; U.S. manufacture and spare parts
Dear Sir:
This is in reference to an application for relief from
duties filed by Crest Tankers, Inc., in relation to the above
referenced vessel repair entry dated December 21, 1992. The
entry and the application were timely filed. The vessel arrived
at the port of Corpus Christi, Texas, on December 21, 1992.
FACTS:
The S/S MONTRACHET is an United States-flag vessel owned by
Crest Tankers, Inc. The subject vessel arrived in the United
States after having extensive foreign vessel repair work
performed at a shipyard in Croatia, during the period of November
4 through December 1, 1992. Customs and the vessel operator are
in substantial agreement on the issue of dutiability, and only
(7) seven items are offered for our review.
The applicant claims that certain items listed on Viktor
Lenac Shipyard Invoice 38 are non-dutiable costs for services,
staging, transportation, inspections, modifications and spare
parts. Our findings as to the following invoices are set-forth
below:
ABS Gauging
Kansas Packing Co. Inc. invoice 25332
Mariners-Astubeco & Texas Marine Supply invoices
World Wide Metric (3 items) Port Electric & Fax Message
Viktor Lenac (VL) item 606a
Viktor Lenac (VL) item 802b, c & d (not c add)
Viktor Lenac (VL) item 806 & 807a
ISSUES:
(1) Whether the foreign shipyard work described in Viktor Lenac
Invoice 38 in items 806 and 807a constitutes modifications
to the hull and fittings of the vessel so as to render the
work nondutiable under 19 U.S.C. 1466.
(2) Whether the costs for accessing referred to in item 606a
constitute dutiable repair costs.
(3) Whether the costs for gauging referred to in item 802b, c, &
d constitute dutiable repair costs.
(4) Whether the costs for an ABS gauging survey constitute
dutiable repair costs.
(5) Whether sufficient evidence is presented to establish that
certain owner supplied parts or spare parts used in the
foreign repair work are owner-supplied spare parts or spare
parts which are free under the vessel repair statute (19
U.S.C. 1466(h).
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.
In its application of the vessel repair statute, the Customs
Service has held that modifications, alterations, or additions to
the hull and fittings of a vessel are not subject to vessel
repair duties. Over the course of years, the identification of
work constituting modifications on the one hand and repairs on
the other has evolved from judicial and administrative precedent.
In considering whether an operation has resulted in a
modification that 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, 18 C.C.P.A. 137 (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 constitutes a new design feature
and does not merely replace a part, fitting, or
structure that is performing a similar function.
4. Whether an item under consideration provides an
improvement or enhancement in operation or efficiency
of the vessel.
For purposes of section 1466, 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.
T.D. 34150, 26 Treas. Dec. 183, 184 (1914)(quoted with approval
in Admiral Oriental).
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.
Item 806 of the subject invoice shows that the flat bar was
removed and a new gusset bracket and stringer face plate were
installed, and in item 807(a) cracked flanges and webs were
renewed. These repairs were made to replace damaged parts.
Accordingly, items 806 and 807(a) are dutiable repair costs.
Where accessing work is integral to dutiable repairs, the
accessing work is also dutiable (see HQ 108366 PH). The accessing
work performed in item 606(a) was for the performance of dutiable
repairs, therefore these costs are dutiable.
In C.I.E. 429/61 we noted that:
... expenses which are incurred in conducting
inspections made subsequent to the repairs,
so as to ascertain whether the work had been
properly performed, are dutiable as integral
parts of the expenses of repairs although
separatly [sic] itemized. Moreover, testing
which is effected for the purpose of
ascertaining whether repairs to certain
machinery or parts of the vessel are
required, or are performed in order to
ascertain if the work is adequately
completed, are also integral parts of the
repairs and are accordingly dutiable.
Pursuant to the holdings in C.I.E. 429/61, ultrasonic
thickness gauging for the purpose of ascertaining whether repairs
are required is considered an integral part of the repair work
performed (See HQ 109144 GEV). In the subject case in Item 802-
Tank Inspection, Sub Item (3) ultrasonic gauging, it indicates
that all readings were satisfactory and no repairs arose out the
gauging. Therefore, the cost associated with item 802(c) is non-
dutiable. With regard to item 802 (b), expenses which are
incurred in conducting inspections made subsequent to repairs to
ascertain whether repairs are necessary are dutiable. Therefore,
the cost associated with item 802(b) is dutiable. We note that
in item 802(d) repairs were made to the fuel oil settling tanks,
therefore the cost in item 802(d) is dutiable.
With regard to the ABS gauging survey, Customs has held that
where periodic surveys are undertaken to meet the specific
requirements of a classification society, insurance carrier,
etc., the cost of the surveys is not dutiable even when dutiable
repairs are effected as a result thereof; however, in the
liquidation process Customs should go beyond the mere labels of
"continuous" or "ongoing" before deciding whether the item is
dutiable. If an inspection or survey is conducted as a part of
an ongoing maintenance and repair program labelled "continuous"
or "ongoing" the cost is dutiable. Also, if the survey is to
ascertain the extent of damage sustained, or to ascertain if the
work is adequately completed, the costs are dutiable as part of
the repairs which are accomplished pursuant to holdings in C.I.E.
429/61, C.S.D. 79-2, and C.S.D. 79-277. Accordingly, we find the
ABS gauging survey to be non-dutiable.
With regard to the items of cost relating to those items
which are alleged to be a part of the ship's spare parts, we have
found that the Customs administration of duty assessment issues
under section 1466 regarding U.S.-made materials purchased in the
U.S. had for some time been guided by the terms of Treasury
Decision 75-257 (T.D. 75-257). That decision provides that when
materials of U.S.-manufacture are purchased by the vessel owner
in the U.S. for installation abroad by foreign labor, the labor
cost alone is subject to duty under section 1466. When those
same materials are purchased by the owner overseas or purchased
in the U.S. by parties other than the owner, the cost of the
materials themselves (even though of U.S.-manufacture) was also
subject to vessel repair duty.
The climate with regard to parts shipped abroad from the
United States for foreign installation was transformed on
August 20, 1990, when the President signed Public Law 101-382
which added a new subsection (h) to section 1466. While this
provision applies by its terms only to foreign-made imported
parts, there is ample reason to extend its effect to U.S.-made
materials as well. To fail to do so would act to discourage the
use of U.S.-made materials in effecting foreign repairs since
continued linkage of remission provisions of subsection (d)(2)
with the assessment provisions of subsection (a) of section 1466
would obligate operators to pay duty on such materials unless
they were installed by crew or resident labor. If an article is
claimed to be of U.S. manufacture, there must be proof of its
origin in the form of a bill of sale or domestic invoice. If an
article is claimed to have been previously entered for
consumption, duty paid by the vessel operator, there must be
proof of this fact in the form of a reference to the consumption
entry number for that previous importation, as well as to the
U.S. port of importation. If imported articles are purchased
from third parties in the United States, a domestic bill of sale
to the vessel operator must be presented. Further, with regard
to imported articles, there must be presented a certification
from the owner or master that the vessel at issue is a cargo
vessel and that the imported articles were purchased for
installation aboard the company's vessels.
If the elements stated above are proven to the satisfaction
of Customs, the cost of foreign labor utilized for installation
of U.S.-made or previously imported articles will be subject to
duty under section 1466 in matters concerning repairs, and only
the cost of qualifying materials used in repairs will be free of
duty. Modifications will of course continue to be treated as
duty-free, both materials and labor.
The provisions set forth in 1466(h) expired on December 31,
1992. In the subject case the vessel entered the U.S. prior to
the expiration of the subject statutory provisions, therefore,
the invoices relating to spare parts will be treated according to
the provisions set forth above.
With regard to Kansas Packing Co., Inc. invoice No. 25332,
Mariners-Astubeco & Texas Marine Supply invoices, and World Wide
Metric (3 items) Port Electric & Fax Message, the documents
submitted are insufficient to sustain proof that the articles
used in the foreign repairs were spare parts that were previously
imported and duty paid or are U.S. manufactured parts.
HOLDING:
(1) The foreign shipyard work described in Viktor Lenac Invoice
38 in items 806 and 807a constitutes dutiable repair costs.
(2) The costs for accessing referred to in item 606a constitute
dutiable repair costs.
(3) The cost in item 802(c) for Ultrasonic thickness gauging
where no repairs were made constitutes non-dutiable testing
and inspection cost. The costs for gauging referred to in
item 802b, constitute expenses which were incurred in
conducting inspections made subsequent to repairs to
ascertain whether repairs were necessary are dutiable.
Therefore, the cost associated with item 802(b) is dutiable.
In item 802(d) repairs were made to the fuel oil settling
tanks, therefore the cost in item 802(d) is dutiable.
(4) The work performed in the ABS gauging survey constitutes
non-dutiable costs.
(5) The evidence submitted is insufficient to sustain that
either duty has been paid on or that certainother owner-supplied parts are of U.S. origin. In absence
of such evidence, the cost of the owner supplied parts is
dutiable. If, prior to liquidation, the proper
certification and/or proof of prior importation is
presented, the said items considered under section 1466(h)
would be considered free of duty.
Sincerely,
Arthur P. Schifflin
Chief
Carrier Rulings Branch