VES-13-18 CO:R:IT:C 112311 BEW
Deputy Regional Director
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, California 90831-0700
RE: Vessel Repair Entry No. H24-0010263-6; F/V PROGRESS; Petition;
modifications; discounts; unreported or undeclared costs; 19
U.S.C. 1466; 19 C.F.R. 4.14(d)(1)(iv)
Dear Sir:
This letter is in response to your memorandum which forwards
a petition for review filed in conjunction with the above-
referenced vessel repair entry.
FACTS:
The record reflects that the subject vessel, the F/V PROGRESS,
arrived at the port of Anchorage, Alaska, on January 4, 1991.
Vessel repair entry No. H24-0010263-6 was filed on the same day as
arrival. The entry indicates that the vessel underwent a dry-
docking in Japan during December 1990. During the dry-docking, the
company employing the agents coordinating the shipyard work went
out of business. Consequently, the vessel operator dealt directly
with the various vendors of items used in the dry-docking. In
turn, untranslated invoices which the operator claimed are
substantially above the standard price were submitted. The dry-
docking involved, among other items, the installation of a new
plate freezer.
By decision dated July 9, 1992 (111792 JBW), we ruled on the
application for relief as follows:
(1) The installation of the freezer plates
in the vessel constitutes a modification, the
cost of which is not subject to duty under 19
U.S.C. 1466. However, because a discount
was not apportioned between dutiable and non-
dutiable items in the invoice, this discount
must be disallowed when calculating the
dutiable value of the work. Similarly, because
the discount was not apportioned, the dutiable
cost of the tax must be calculated based on the
entire cost of the dutiable work.
(2) An untranslated invoice may not be submitted as part
of an application for relief from the assessment of
vessel repair duties. Costs appearing under this invoice
are subject to duty.
(3) Absent evidence of United States manufacture,
fishing nets purchased from a United States supplier that
were shipped to the vessel in Japan are subject to duty
under 19 U.S.C. 1466.
The petition for review centers primarily around discount
costs.
The petitioner has submitted new documentation and invoices.
The petitioner acknowledges that the subject costs are dutiable,
but alleges that the costs originally claimed to have been incurred
on this transaction for services/materials rendered were
discounted. In the petition it is stated that these costs are
listed immediately followed by the total amount actually paid and
agreed upon by the vendors to be accepted as the full and complete
payment. The petitioner has submitted letters from the vendors
which state that amount of the invoice and the amount of the actual
payment. The letters also state that the amount actually paid has
been accepted as full payment. The petitioner claims that the
discount should be apportioned between those costs which are
dutiable and those costs which are nondutiable.
ISSUES:
(1) Whether the installation of the freezer plates in the
vessel constitutes a modification, the cost of which is not subject
to duty under 19 U.S.C. 1466.
(2) Whether relief may be granted under the provisions of
19 U.S.C. 1466 for discount costs associated with costs for repair
work performed in foreign shipyards. 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 incorporatedin 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.
The Customs Service recognizes that only actual expenses borne
by the vessel should be taken into consideration when liquidating
vessel repair entries; we have thus permitted the deduction of
"discounts," which are properly documented, from the invoiced cost
of parts or materials (see C.I.E. 227/63, dated December 20, 1962).
In cases where dutiable and non-dutiable work appears, the discount
must be apportioned between such work.
The petitioner refers to the discount which was negotiated
with the shipyard. The petitioner seeks relief for costs appearing
in Part I of the Mayekawa Mfg. Co., Ltd., invoice for the
installation of a contact freezer, and for costs appearing in Part
II of the Mayekawa invoice for service of the ship's existing
refrigeration system. The applicant acknowledges that the costs
for Part II are dutiable. Although such an acknowl-edgement
appears in the documentation, the discounted amount was calculated
from the total amount of the invoice instead of from each
individual item or part. In view of the fact that this invoice
contains both dutiable and nondutiable work, the discount is not
properly apportioned between such work.
The record shows that the shipyard deducted from the grand
total a "special discount" in the amount of 1,224,290. The
petitioner has submitted a letter from the vendor which states that
the total amount accepted as payment in full for Part I and Part
II is 8,240,000. The discount is neither apportioned on the
invoice nor in the vendor's letter between the costs on Part
I and Part II. The discount must therefore be disallowed when
calculating the dutiable value of the work performed in Part II of
the invoice. Thus, the dutiable cost for the servicing of the
ship's refrigeration system is 4,088,340 (subtotal of Part II).
We have reviewed the descriptions provided in the invoice and find
that the installation of the contact freezer represents a new
design feature. Accordingly, the cost of this installation (Part
I) is not subject to duty.
In addition, the shipyard added a three percent consumption
tax after the discount was taken. The Customs Service has held
that foreign government taxes constitute dutiable expenses as that
term is used in the vessel repair statute. Because the discount
was not apportioned, the dutiable cost of the tax must be
calculated based on the cost for servicing the ship's refrigeration
system; this amount is 122,650. Thus, the total dutiable cost for
the Part II of the Mayekawa invoice is 4,210,990.
With regard to the remaining invoices, we find that the
letters submitted from the vendors are sufficient documentation to
show that certain discounted amounts were accepted in full. Where
it is clear on the face of the invoice that the total amount is
dutiable, you may accept the vendor's letter as the full discounted
amount for liquidation purposes. In those instances were the
invoice contains both dutiable and nondutiable costs and the
discounted amount is not appropriated between the dutiable and the
nondutiable amount, the discount is disallowed.
With regard to Tokai Fish Machinery Co., Ltd. - All costs are
dutiable except the cost of 7,000 for packing and transportation.
Please liquidate the entry in the amount of 1,000.000 on this
invoice.
In addition, the petitioner has submitted documentation and
an invoice relating to cost of certain foreign repairs performed
by Nichimo Co., Inc., which was not reported or declared on the
Customs Form 226 at the time of entry of the vessel.
The petitioner claims that negotiations were going on
regarding the role of Tanno Marine Co., LTD., which no longer
exits, and various vendors relating to costs. The petitioner
alleges that in the resulting confusion, it appears that an invoice
from one of the vendors was not included in the documents submitted
to the writer of the petition, therefore, the invoice from Nichimo
Co., Inc., was not submitted to Customs. It alleges that certain
fishing net material was declared under the Net Systems, Inc.
invoice and the Nichimo Co, Inc. invoice. The petitioner states that the subject information was not noted in
review prior to submission of the application by the staff of
Pacific Bounty, Inc., and that in reviewing the documentation for
the filing of the petition, it discovered that the Nichimo invoice
had not be included in the application. It admits that the
material covered by the Invoice is subject to duty, however, the
original amount of the invoice was reduced from 7,082,785 to
1,096,000, as per a statement from Nichimo. The petitioner has
submitted a letter from Nichimo Co., Ltd. which states that the
sum of 1,096,000 has been accepted as payment in full for all work
performed and material furnished by Nichimo.
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 (see 110845 BEW, dated
January 16, 1991).
With regard to the items of cost relating to these invoices,
we find all items of cost to be dutiable. Please liquidate this
invoice in the amount of 1,096,000, the discounted amount.
HOLDINGS:
(1) The installation of the freezer plates in the vessel
constitutes a modification, the cost of which is not subject to
duty under 19 U.S.C. 1466.
(2) Relief may be granted under the provisions of 19 U.S.C.
1466 for discount costs associated with costs for repair work
performed in foreign shipyards as discussed in the Law and Analysis
section of this ruling.
The petition is granted in part and denied in part.
Sincerely,
Stuart P. Seidel
Director, International
Trade Compliance Division