VES-13-18 CO:R:IT:C 112050 LLB
Chief, Technical Branch
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831
RE: Vessel Repair; Modification; Negotiated Price Reduction;
Petition for Review; GLACIER BAY; Entry No. C31-0008312-1
Dear Sir:
This letter is in response to your memorandum of December
10, 1991, which forwards for our determination the petition for
review of the Customs decision in case number 111483, covering
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.
A decision was rendered on an application for relief filed
in regard to the subject entry, and the appeal from that decision
requests review of two elements. The first concerns the
dutiability of invoice item 715, work on the oil-tight
longitudinal bulkhead. The second element presented for review
is whether a reduction negotiated between the repair facility and
the vessel operator may be honored for purposes of determining
the duty amount which should be liquidated by Customs.
ISSUE:
(1) Whether duty may be remitted for modification work
undertaken to address an area of a vessel which is subject to a
frequently recurring need for repairs.
(2) Whether a negotiated reduction in the amount payable for
foreign shipyard operations, agreed upon between a foreign
shipyard and a vessel operator, may be taken into account for
purposes of reducing overall vessel repair duty liability.
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.
It is the long-held position of the Customs Service that
even if an operation is a true modification to the vessel, if an
unsegregated repair element is accomplished in conjunction with
the modification process, the entire cost is considered dutiable
as a repair. These circumstances would most typically occur in
addressing an area of a vessel subject to frequent service
problems by modifying the structure to eliminate the need for
recurring repairs. Often the repairs to that area are
accomplished at the same time. This was thought to be the case
in the present matter in regard to the structural reinforcement
operations performed on the longitudinal bulkhead in invoice item
number 715, and the item was held to be dutiable in our previous
ruling. A second review of the invoices reveals, however, that
the foreign shipyard operations were limited to modification
processes with no repairs being performed. This being the case,
we now find the operation in item number 715 to be a duty-free
modification.
In the matter of negotiated discounts or reductions in the
payable amount, the Customs Service, in a published ruling
(C.I.E. 227/63), held that the actual expenses borne by the
vessel operator should be taken into consideration when duty is
assessed under the vessel repair statute, and that discounts
should be allowed in liquidating vessel repair entries.
Accordingly, that portion of the discounted amount which is
attributable to dutiable repairs should be deducted from the
cost of those repairs.
HOLDING:
After a thorough consideration of the facts as presented,
and following an analysis of the law and applicable judicial and
administrative precedents, we have determined to allow the
Petition for Review as specified above.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch