VES-13-18-OT:RR:BSTC:CCI H016493 JLB
Supervisory Import Specialist
Vessel Repair Unit
1515 Poydras Street, Suite 1700
New Orleans, LA 70112
RE: Protest No. 2002-07-101500; Vessel Repair Entry No. AYW-0468101-7; Vessel: ENDEAVOR: V-58; Modification; Cleaning; 19 U.S.C. § 1466
Dear Sir:
This letter is in response to your memorandum of August 17, 2007, which forwarded the above-captioned protest to the assessment of vessel repair duties for our review.
FACTS
On September 30, 2004, while in Malta, the vessel ENDEAVOR underwent various shipyard operations. The vessel arrived in the port of Newark, New Jersey on October 31, 2004 and an application for relief from duties was filed timely. Pursuant to your office’s letter of April 13, 2007, duties in the amount of $442,043.77 were assessed. A protest was timely filed. Duties in the amount of approximately $92,700 are the subject of this protest. The protestant claims that the costs of the installation of a new food warming table and the galley deck replacement necessary to install the table were non-dutiable modifications. Also, it is claimed that the engine room tank cleaning is non-dutiable as it was necessitated by the required ABS inspection.
ISSUES
Whether the work in question performed on the vessel while in a foreign shipyard constitutes a modification to the vessel and therefore is not dutiable under 19 U.S.C. § 1466?
Whether the engine room tank cleaning in question is dutiable under 19 U.S.C. § 1466?
LAW AND ANALYSIS
Pursuant to 19 U.S.C. § 1466(a), there must be a 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 engage in such trades. U.S. Customs and Border Protection (“CBP”) has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. In considering whether an operation has resulted in a non-dutiable modification, the following factors, which have evolved from judicial and administrative precedent, have been considered:
1. Whether there is a permanent incorporation into the hull or superstructure of a vessel.
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.
A leading case in the interpretation and application of § 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.
“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.” See Admiral Oriental, supra., (quoting T.D. 34150, (1914)). Furthermore, in Otte v. United States, equipment is defined as “the furniture of whatsoever nature which is put into a finished ship in equipping her.” 7 C.C.P.A. 166, 169 (1916).
The court attempted to distinguish non-dutiable items which are part of the hull and fittings of a vessel from dutiable equipment, as defined above. Non-dutiable items might 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.” See Admiral Oriental, supra., (quoting 27 Op. Atty. Gen. 228).
The food warming table is furniture that is not permanently incorporated into the hull. According to the invoice provided, the table was bolted to the galley floor in such a way that it could be “readily installed and removed.” See Exhibit 1(d) of the Protest.
It is further noted that under long-standing and consistently applied administrative policy, an installation, even one of a permanent nature, is considered to be a dutiable repair rather than a modification if the installation addresses a repair need. Thus, if an area of a vessel is enhanced by the replacement of one permanent installation with another, the operation is considered dutiable if evidence reveals that a defect or wastage was present in the former installation, which condition was cured by replacement. See Headquarters Decision 110731, dated March 29, 1990. CBP has held that for an item to be characterized as a nondutiable modification, it must encompass the installation of an item as a new design feature, not as a replacement for, or restoration of, parts now performing a similar function. See Headquarters Decision 109971, dated June 12, 1989. Dutiable repairs include repairs or replacements for “any wasted, deteriorated, or defective equipment, materials, or areas of the vessels.” See Headquarters Decision 108998, dated February 1, 1988.
In the present case, an employee of the protestant, in the submitted affidavit, states that before item 119, the food warming table, was installed “the prepared food was maintained at temperature by placing the serving dishes in pans of hot water on the 440-volt stovetop.” The employee concedes that this arrangement was unsafe and created a potential electrocution hazard. At the time the flooring was replaced, a 21 inch wide drain recess surrounding the old center island was removed because it was classified as a tripping hazard. This demonstrates that the food warming table was a replacement for defective equipment and is performing a similar function. Accordingly, we find that item 119 constitutes a dutiable repair.
The United States Court of Appeals for the Federal Circuit has ruled that expenses that would not have been incurred "but for" the dutiable repair work done are themselves dutiable, and, conversely, expenses that would not have been incurred but for the non-dutiable work done are themselves non-dutiable. Texaco Marine Services, Inc. v. United States, 44 F.3d 1539 (Fed. Cir. 1994). Therefore, items 118-1 and 118-2 are dutiable since the galley deck would not have needed to be replaced but for the installation of the food warming table.
As for item 121, the engine room tank cleaning, CBP has held that mere cleaning operations are not dutiable. However, cleaning operations that would not have been incurred “but for” the dutiable repair work done are themselves dutiable, and, conversely, expenses that would not have been incurred but for the non-dutiable work done are themselves non-dutiable. Texaco Marine Services, Inc. v. United States, 44 F.3d 1539 (Fed. Cir. 1994).
CBP has held that inspections not resulting in repairs are not dutiable. See Headquarters Decision 110395 and American Viking Corp. v. United States, 37 Cust. Ct. 237, 247, C.D. 1830 (1956). Where periodic surveys are undertaken to meet the specific requirements of, for example, a classification society or insurance carrier, the cost of the surveys is not dutiable even when dutiable repairs are effected as a result thereof. C.S.D. 79-277 and Headquarters Decision 110368. Where an inspection or survey is conducted merely to ascertain the extent of damages sustained or whether repairs are deemed necessary, the costs are dutiable as part of the repairs which 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).
The burden is on the protestant to establish, by adequate, clear, and satisfactory documentary evidence, that the item is non-dutiable under 19 U.S.C. § 1466. See Headquarters Decision 116462, dated May 16, 2005. The protestant claims that the cleaning of the engine room tanks was necessary in order to facilitate the required ABS inspection. However, the cleaning of the engine tanks could have been necessitated by the dutiable repairs performed on the HFO Purifier Heater (item 516) and the Oily Water Separator (item 551). The United States Court of Appeals for the Federal Circuit ruled that the CBP’s method of prorating duties based on the ratio of dutiable work versus non-dutiable work in regard to dual-purpose expenses is consistent with the "but for" test and section 1466(a). SL Service, Inc. v. United States, 357 F.3d 1358 (Fed. Cir 2004), panel reh’g and reh’g en banc denied, 2004 U.S. App. LEXIS 10322 (April 19, 2004).
The protestant claims that dutiable repairs were unnecessary and offers documentation to the effect that when the subject tanks were surveyed, the ABS rated the condition of the tanks as “satisfactory.” See ABS Report, Protest Exhibit 1(e). However, the shipyard invoice makes no mention of ABS or classification surveys. Accordingly, in view of the fact that the evidence submitted as discussed above indicates that the cleaning costs in item 121 can be attributed to both dutiable and non-dutiable costs, the cost of this item is prorated.
HOLDING
After a thorough review of the record, the protest is denied in part and granted in part as detailed above.
In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any recalculation of duties of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Glen E. Vereb, Chief
Cargo Security, Carriers and Immigration Branch