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