VES-13-18 CO:R:IT:C 111483 JBW

Chief, Technical Branch
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831

RE: Vessel Repair; Modification; Inspection; Cleaning; Staging; United States Parts; GLACIER BAY; Entry No. C31-0008312-1.

Dear Sir:

This letter is in response to your memorandum of January 16, 1991, which forwards for our review the application for relief filed in conjunction with the above-referenced vessel repair entry.

FACTS:

The record reflects that the subject vessel, the S/S GLACIER BAY, arrived at the port of Valdez, Alaska, on June 3, 1990. Vessel repair entry, number C31-0008312-1, was filed on June 4, 1990, and was marked incomplete. A complete entry was filed on August 29, 1990, pursuant to an extension of time authorized by the Pacific Region Vessel Repair Liquidations Unit. The complete entry indicated extensive foreign shipyard work in the nature of a complete drydocking, including both repairs and work claimed to be non-dutiable as modifications, inspections, and cleaning.

ISSUE:

(1) Whether certain work performed to the vessel in the Hyundai Shipyard resulted in modifications to the vessel and is therefore not subject to duty under 19 U.S.C. 1466.

(2) Whether the load tests of the life boat davits, which did not result in repairs, are not dutiable as inspections under 19 U.S.C. 1466.

(3) Whether a cleaning not performed in conjunction with dutiable repairs is dutiable.

(4) Whether staging costs associated with ultrasonic thickness gauging to ensure that steel renewals conform to thickness requirements are dutiable.

(5) Whether parts used in the repairs of the vessel are dutiable, if such parts are documented to be of United States origin or to have been imported into the United States, duty- paid.

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.

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 applicant seeks relief for the following items. Our conclusions are as follows:

Hyundai Item 63: Segregated Ballast Valves:

The work performed under this item resulted in the replacement of existing parts from the ship spares and does not constitute a new design feature. The cost of the work is dutiable.

Hyundai Item 70: Aft Bunker Storage Tank Bellmouth:

The work performed under this appears to have resulted in the replacement of existing parts and does not constitute a new design feature. No Specifications appear for this item. The cost of the work is dutiable.

Hyundai Items 105(b) & (e): Miscellaneous Pipe Repairs and Renewals:

The work claimed to be non-dutiable in these items involved moving the fuel oil loading manifold (item 105(b)) and installing expansion joints to the port and starboard stripping lines (item 105(e)). The work performed to move the fuel oil loading manifold was required to address a problem resulting from the original design of the ship. Trinidad Statement on New Installations and Modifications at 2, August 10, 1990 (hereinafter "Statement"). This work resulted in an improvement to the vessel that is not repair related; the costs appearing under Hyundai Invoice Item 105(b) are not dutiable.

The work performed to install the expansion joints to the port and starboard stripping lines was required to correct "repeated damage to the pipe connection." Statement at 1. This work is repair related, and we find the cost for Hyundai Item 105(e) to be dutiable.

Hyundai Items 601 to 605: Structural Steel Modifications:

The work performed under these items involved the installation of additional hull supports. The work was required to address repeated cracking of the bulkhead stiffeners. Statement at 2-3; Hyundai Invoice items 603 & 604. The work is therefore repair related and is subject to duty.

Hyundai Items 701 to 702: Structural Steel Renewals:

Hyundai Invoice Items 701 and 702 involve the "renewals" of the plating of bulkhead 105 and of the after bulkheads of the port and starboard chain lockers. The work performed under these items involve restoration of existing parts of the hull and do not represent new design features. The cost for these items is dutiable.

Hyundai Item 715: Oiltight Longitudinal Bulkhead:

The work carried out under this item was required to address repeated cracking of longitudinal stiffeners. Statement at 3. The work is therefore repair related and is subject to duty.

Hyundai Item 800: Heating Coil Retrofit:

This item involved the installation of cargo heating coils in twelve cargo tanks along with associated supply and return risers and deck piping. The work description and drawings demonstrate that this item involved the installation of a new design feature. The work constitutes a modification and is not subject to duty.

The applicant claims that Hyundai Invoice Item 21, which involved the load test of a life boat davit, was not dutiable as an inspection to meet Coast Guard requirements. Customs 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). The invoice description and the contract specifications indicate that tests were performed, but that no repairs to the life boats or life boat davits were required. We find this item not dutiable.

The applicant also seeks relief for Hyundai Invoice Item 64, port and starboard fuel oil settler temperature wells. This operation involved the installation of new design feature; the work is considered a non-dutiable modification. Associated with this operation was the partial cleaning of the port and starboard bunker tanks. The Customs Service has consistently 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 111204, dated December 7, 1990. No dutiable repairs were made for this item, and the cleaning costs associated with the work are consequently not dutiable.

Under Hyundai Invoice Item 722, the applicant claims that staging costs associated with ultrasonic thickness gauging to ensure that steel renewals conform to thickness requirements were not dutiable. The gauging was in the nature of an inspection to ensure that repairs were adequately performed and is therefore dutiable. Under long-standing Customs interpretations, charges relating to staging are not dutiable. E.g., Headquarters Ruling Letter 109510, dated June 15, 1988. However, under this invoice item, a single cost appears. Where dutiable and non-dutiable costs are not segregated within an invoice item, all of the charges in that invoice item must be deemed dutiable. Headquarters Ruling Letter 108567, dated September 10, 1986. Absent a cost breakdown, we find the cost of the staging to be dutiable.

Finally, the applicant seeks relief for parts manufactured in the United States or imported into the United States with duty paid. 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.

We have reviewed the invoices included in the application and have determined that the following invoices meet the above- described evidentiary requirements for duty exemption:

Harbor Ship Supply Bailey & Associates Wilson Walton International W & O Supply North American Refractories James G. Wiley Trimodal Distribution Unaflex Consolidated Freightways Harbor Ship Electric Co. Saab Tank Control Parmatic Pollution Control Port Electric Supply Mathiasen's Tanker Industries Boiler Tube Company Mar-Dustrial Sales, Inc. Schat-Marine Safety Aqua-Chem Inc. EIM Controls Bell & Gossett Electocatalytic Inc. Fuji Trading Co. Kvaerner Eureka Peacock Inc.

The Ameron Marine Coatings Division invoice indicates that the goods listed on the invoice were shipped from the "Far East" to the ship in Korea. Notwithstanding the fact that a United States bill of sale is presented, the invoice does not prove that the goods were of United States origin or were imported into the United States, duty-paid. We therefore find these items to be dutiable, provided that the work in which the goods were used is also dutiable. Likewise, the goods provided for in the Sanki International and Victor Pyrate Ltd. invoices do not establish the required nexus with the United States.

HOLDINGS:

(1) We find that, consistent with our analysis above, certain work performed to the vessel in the Hyundai Shipyard resulted in modifications to the vessel and is therefore not subject to duty under 19 U.S.C. 1466.

(2) Load tests of the life boat davits, which did not result in repairs, are not dutiable under 19 U.S.C. 1466.

(3) Cleaning not performed in conjunction with dutiable repairs is not dutiable.

(4) Staging costs associated with ultrasonic thickness gauging to ensure that steel renewals conform to thickness requirements, which are not segregated from the costs of the dutiable steel renewals, are dutiable.

(5) Parts used in the repairs of the vessel are not dutiable if such parts are documented to be of United States origin or to have been imported into the United States, duty- paid.


Sincerely,

B. James Fritz
Chief
Carrier Rulings Branch