VES-13-08-RR:IT:EC 112851 GEV

Chief, Liquidation Section
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94111

RE: Vessel Repair Entry No. 110-0104415-2; SEA-LAND PACIFIC; V-59; Modifications; Administrative Costs; Surveys; 19 U.S.C.  1466

Dear Sir:

This is in response to a memorandum from the Deputy Regional Director, Commercial Operations, Pacific Region, dated August 3, 1993, forwarding an application for relief from vessel repair duties assessed pursuant to 19 U.S.C.  1466. We were requested to review several of the items contained within the above-referenced entry. Our review of this matter is set forth below.

FACTS:

The SEA-LAND PACIFIC is a U.S.-flag vessel operated by Sea-Land Service, Inc. The vessel incurred foreign shipyard work in Kaohsiung, R.O.C., during the period of January 26, 1993, through February 3, 1993. Subsequent to the completion of the work, the vessel arrived in the United States at Tacoma, Washington, on February 14, 1993. A vessel repair entry was filed on February 22, 1993.

Pursuant to an authorized extension of time, an application for relief with supporting documentation was timely filed. Included in the work performed are the following items for which our review is sought:

Item No. Summary Note. Description

1 M1 Raising bridge 2 M2 Hatch covers 3 M3 Lashing corners

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4 M4 (122, 123, 124) Hatch coaming corners 5 M5 (112, 113, 114) Hatch coaming liner 6 M6 (128, 129, 130) Hatch coaming bracket 7 A (throughout invoice) Administrative charges 8 I (198) M(204) ABS Surveys

In support of its claim that the above-listed items are nondutiable, the applicant has submitted invoices, drawings, work specifications and a copy of Customs ruling 112504, dated April 8, 1993.

ISSUES: 1. Whether evidence is presented sufficient to prove that the foreign shipyard work described in Items 1, 2, 3, 4, 5 and 6 specified for our review constitute modifications to the hull and fittings of the vessel so as to render the work nondutiable under 19 U.S.C.  1466.

2. Whether the administrative costs appearing throughout the shipyard invoice are dutiable under 19 U.S.C.  1466.

3. Whether the cost of the ABS surveys described in Item 8 (Summary Notes I(198) and M(204)) are dutiable under 19 U.S.C.  1466.

LAW AND ANALYSIS:

Title 19, United States Code,  1466, provides in part for payment of an ad valorem duty of 50 percent of the foreign cost of equipments, or any part thereof, including boats, purchased for, or the repair parts or materials to be used, or the expenses of repairs made in a foreign country 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 trade.

In its application of the vessel repair statute, Customs has held that modifications to the hull and fittings of a vessel are not subject to vessel repair duties. Over the course of years, the identification of modification processes has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a modification which 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 et al., T.D. 44359 (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

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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 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.

Very often when considering whether an addition to the hull and fittings took place for the purpose of 19 U.S.C.  1466, we have considered the question from the standpoint of whether the work involved the purchase of "equipment" for the vessel. It is not possible to compile a complete list of items that might be aboard a ship that constitute its "equipment". An unavoidable problem in that regard stems from the fact that vessels differ as to their services. What is required equipment on a large passenger vessel might not be required on a fish processing vessel or offshore rig.

"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. Admiral Oriental, supra., (quoting T.D. 34150, (1914))

By defining what articles are considered to be equipment, the Court attempted to formulate criteria to distinguish non-dutiable items which are part of the hull and fittings of a vessel from dutiable equipment, as defined above. These items might be considered to 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... Admiral Oriental, supra., (quoting 27 Op. Atty. Gen. 228).

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A more contemporary working definition might be that which is used under certain circumstances by the Coast Guard; it includes a system, accessory, component or appurtenance of a vessel. This would include navigational, radio, safety and, ordinarily, propulsion machinery.

Upon reviewing the items claimed to be modifications, we note the following.

Item 1 (Summary Note M1) covers the raising of the vessel's bridge (wheelhouse) located behind the cargo landing area. The number of containers that can be carried on the vessel's decks is limited by the ability of the vessel's crew to see over them. The work covered under this particular item increased the height of the bridge to permit the vessel to carry more containers while still meeting visibility requirements. Included in this work were the following additional structural changes: modifying the foremast to meet visibility requirements; modifying the mounting situation of the nuc light to conform to U.S. Coast Guard (USCG) requirements; and raising the diesel generator exhaust stack to prevent exhaust gasses from being pulled into the raised wheelhouse while the vessel is underway. In support of its claim that this work constitutes a modification, the applicant has submitted China Shipbuilding Corporation Kaohsiung Shipyard invoice no. IK-81-056, drawing nos. K3400401, K5700100, K1111530, drawings of the work done to the foremast and nuc light, and Customs ruling 112504.

With respect to ruling 112504, issued in response to an inquiry from Sea-Land's counsel prior to commencement of the work in question, Customs stated therein that it "is advisory only and is not binding on the Customs Service." (Emphasis added) Based on descriptions of the work and drawings provided by counsel, the ruling provided that, "there would appear to be every likelihood that an examination of the invoices detailing the work...would result in a finding that the [subject vessel] had undergone non-dutiable modifications..." However, this finding was qualified by the statement that, "Any final determination in that regard must await the examination of shipyard invoices and other relevant documentation submitted as part of the vessel repair entry process." Our examination of the aforementioned invoices and documentation is set forth below.

China Shipbuilding Corporation Kaohsiung Shipyard invoice no. IK-81-056 states that the shipyard, "Provided labour, equipments and material to carry out the raising the vessel's wheel house from the existing bridge deck (100' - 11" ABL), Wheel house was cut free from the vessel and placed on top of a pre-fabricated trunk, which was then mounted on the vessel's structure to 115' - 0" above base line." In addition, the invoice provided the following pertinent information:

1. STEEL WORK OF WHEELHOUSE - Remove wheelhouse, fabricate new trunk, install wheelhouse on new trunk, reinstall wheelhouse and trunk on board. Details as per Dwg No. K1111530 Structure.

2. CABLING - Splice in new cables to extend cables up to new wheelhouse level.

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Details as per Dwg No. K5700100 Guidance and practice for electrical modification.

3. JOINER WORK - Install new joiner work in new trunk and install new deck coverings.

Details as per Dwg No. K3400401.

The invoice also provides an extensive description of the remaining work incurred under this item, including piping, air conditioning, coating, etc., as well as the additional structural work necessitated as a result of raising the bridge (e.g., replacing the double "goal post" type foremast with a single type to allow visibility forward from the raised wheelhouse, raising the top mast for a navigational light, etc.). Drawings depict the aforementioned work as referenced in the invoice. Upon reviewing the documentation, it is readily apparent that the work under this item is a permanent structural incorporation into the superstructure of the vessel, would remain with the vessel during an extended lay-up, and was not done to replace a defective part of the vessel but rather to enhance the operation of the vessel as a containership. In view of the aforementioned characteristics, we find Item 1 (Summary Note M1) to have met the requisite criteria for a modification.

Item 2 (Summary Note M2) covers work alleged to be the modification of hatch nos. 7, 9 and 11 in order to accommodate the vessel's increased capacity for the carriage of 45' containers. In support of its claim that this work constitutes a modification, the applicant again references China Shipbuilding Corporation Kaohsiung Shipyard invoice no. IK-81-056, drawing nos. N267601MR2, K1100699, K3818401 and Customs ruling 112504.

Ruling 112504 reached the same finding with respect to the hatch work under consideration that it did with the bridge raising discussed above (i.e., "...every likelihood that an examination of the invoices detailing the work...would result in a finding that the [subject vessel] had undergone nondutiable modifications..." However, this finding was qualified by the same statement contained within the ruling that, "Any final determination in that regard must await the examination of shipyard invoices and other relevant documentation submitted as part of the vessel repair entry process." Our examination of the aforementioned invoices and documentation is set forth below.

China Shipbuilding Corporation Kaohsiung Shipyard invoice no. IK-81-056 describes the particular work as including, inter alia, the relocation of ladders, platforms and rails, the raising of hatch grating, and the welding of steel plates to allow for reconfiguration of the hatch covers. The invoice also references the above-listed drawings which extensively delineate the work. Our review of this information leads us to conclude that the work under this item is a permanent structural incorporation into the superstructure of the vessel, would remain with the vessel during an extended lay-up, and was not done to replace a defective part of the vessel but rather to allow the vessel to operate more efficiently in carrying 45' containers. Consequently, we find Item 2 (Summary Note M2) to constitute a modification. - 6 - Item 3 (Summary Note M3) covers the installation of new lashing plates on the no. 1 hatch cover to allow double lashing of containers instead of the existing single lashing. In support of this claim the applicant references China Shipbuilding Corporation Kaohsiung Shipyard invoice no. IK-81-056, an internal Sea-Land letter with an accompanying drawing, and Customs ruling 112504. In regard to ruling 112504, we reiterate what was discussed above with respect to Items 1 and 2 (i.e., its holding is merely advisory and contingent on Customs analysis of documentation submitted pursuant to a vessel repair entry). As to the invoice, we note that it provides, "Removed existing "D" rings, welded 24 PCs eye plates." (Emphasis added) The drawing submitted corroborates installation by welding. Our review of this information leads us to conclude that the work under this item is a permanent structural incorporation into the superstructure of the vessel, would remain with the vessel during an extended lay-up, and was not done to replace a defective part of the vessel but rather to enhance the operation of the vessel as a containership. In view of the aforementioned characteristics of this work, we find Item 3 (Summary Note M3) to constitute a modification.

Item 7 concerns the dutiability of administrative charges that appear throughout the shipyard invoice. (See also Items 4 (Summary Note 123), 5 (Summary Note 113) and 6 (Summary Note 129) specified for our review). Such charges incurred pursuant to nondutiable work (e.g., a modification or casualty-related repairs) are consequently nondutiable as part of that work. If such charges are related to dutiable work they are nondutiable pursuant to Treasury Decision (T.D.) 39443 for those entries that predate the opinion of the U.S. Court of Appeals for the Federal Circuit in Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (1994). Although T.D. 39443, among others, has been thoroughly discredited by Texaco, supra, Customs has determined that the court's decision will only be applied from the decision date (December 29, 1994) forward for all issues other than repair-related cleaning and protective coverings. (See Headquarters memorandum 113350, dated March 3, 1995, published in the Customs Bulletin of April 5, 1995) Therefore, since this entry pre-dates the Texaco decision, the administrative charges in this case are nondutiable. (See also Headquarters rulings 113085 and 113540 holding such charges to be nondutiable.) These same types of charges will be held dutiable for all entries filed on or after December 29, 1994.

Item 4 (Summary Notes 122 and 124 specified for our review) cover the alleged modification of hatch coamings at hatch nos. 4, 5, 6, 7, 8, 9, and 10. The applicant states that a 75 mm split pipe was inserted in the hatch coaming corners to eliminate sharp corners and resulting high stresses and the related damages. It is further stated that prior to this work, unacceptably high levels of damage were experienced in these areas resulting in lost cargo productivity and longer-than necessary port stays. This work reinforces this area and prevents this damage, improves cargo productivity and reduces the time the vessel is idle at the dock. In support of this claim the applicant has submitted the shipyard invoice (Sea-Land Job Order #:PS6702, Item 10-2) describing the work done which also contains a drawing. Our review of this information leads us to conclude that the work under this item is a permanent structural incorporation into the superstructure of the vessel, would remain with the vessel during an extended lay-up, and was not done to replace a defective part of the vessel but rather to improve - 7 -

the vessel's ability to carry cargo without damaging it. In view of the aforementioned characteristics of this work, we find Item 4 (Summary Notes 122 and 124) to constitute a non-dutiable modification.

Item 5 (Summary Notes 112 and 114 specified for our review) covers the alleged modification of hatch cover liners at hatches 4, 11, 12S, and 13P. The applicant states that "[t]he existing liners were composed of mild steel and were subject to frequent damage due to corrosion and wear." (Emphasis added) As a result, cargo productivity was lost due to the inability to work cargo during repairs which lead to longer-than-necessary port stays. It is contended that this work will improve cargo productivity and reduce the time the vessel is at the dock. In support of this claim the applicant has submitted the shipyard invoice (Sea-Land Job Order #:PS6702, Item 5.1-24) describing the work done which also contains a drawing. Our review of this information leads us to conclude that notwithstanding the fact that this particular work appears to have met some of the conditions of a modification (i.e., the new stainless liners were "welded" on top of existing plates thereby rendering them a permanent incorporation into the superstructure which would remain on board during an extended lay-up), the fact that the work was done because the existing liners were subject to "frequent damage due to corrosion and wear" is indicative of the fact that the work was done to replace a defective part of the vessel. We note that the cost of replacing corroded material is dutiable where, as in this case, it is not segregated from modification work. (Customs ruling 110369). Furthermore, Customs has long-held that shipyard work necessitated by ordinary wear and tear is dutiable. (C.I.E. 1243/60) Accordingly, Item 5 (Summary Notes 112 and 114) is not a modification but rather is a dutiable repair.

Item 6 (Summary Notes 128 and 130 specified for our review) cover the alleged modification of hatch coaming brackets. The applicant states that, "[t]he existing brackets were structurally unacceptable and were subject to frequent fractures." (Emphasis added) This condition resulted in lost cargo productivity due to the inability to work cargo during repairs and longer-than-necessary port stays. This work included the replacement of these brackets with an extended bracket which will serve to avoid fractures and result in improved cargo productivity and reduced idle time at the dock. In support of this claim the applicant has submitted the shipyard invoice (Sea-Land Job Order #:PS6702, Item 10-4) describing the work done which also contains a drawing. Our review of the record leads us to conclude that notwithstanding the fact that this particular work appears to have met some of the conditions of a modification (i.e., the new brackets were "welded" in place thereby rendering them a permanent incorporation into the superstructure which would remain on board during an extended lay-up), the applicant states that the work was done because the existing brackets were subject to "frequent fractures." Consequently, since this work replaces a current part not in good working order, it constitutes a repair notwithstanding the fact that it improves the operation of the vessel. Accordingly, Item 6 (Summary Notes 128 and 130) is not a modification but rather a dutiable repair.

Item 8 (Summary Notes I(198) and M(204)) covers surveys done by the American Bureau of Shipping (ABS) for the tailshaft, and the structural modifications discussed in Items 1 and 2, above. In regard to the dutiability of inspection/survey costs, we note that C.S.D. 79-277 stated - 8 -

that, "[i]f the survey was undertaken to meet the specific requirements of a governmental entity, classification society, insurance carrier, etc., the cost is not dutiable even if dutiable repairs were effected as a result of the survey."

With increasing frequency, this ruling has been utilized by vessel owners seeking relief not only from charges appearing on an American Bureau of Shipping (ABS) or U.S. Coast Guard invoice (the actual cost of the inspection) but also as a rationale for granting non-dutiability to a host of inspection-related charges appearing on a shipyard invoice. In light of this continuing trend, we offer the following clarification.

C.S.D. 79-277 discussed the dutiability of certain charges incurred while the vessel underwent biennial U.S. Coast Guard and ABS surveys. That case involved the following charges:

ITEM 29 (a) Crane open for inspection (b) Crane removed and taken to shop. Crane hob and hydraulic unit dismantled and cleaned (c) Hydraulic unit checked for defects, OK. Sundry jointings of a vessel's spare renewed. (d) Parts for job repaired or renewed. (e) Parts reassembled, taken back aboard ship and installed and tested.

In conjunction with the items listed above, we held that a survey undertaken to meet the specific requirements of a governmental entity, classification society, or insurance carrier is not dutiable even when dutiable repairs are effected as a result of a survey. We also held that 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 (emphasis added).

It is important to note that only the cost of opening the crane was exempted from duty by reason of the specific requirements of the U.S. Coast Guard and the ABS. The dismantling and cleaning of the crane hob and hydraulic unit was held dutiable as a necessary prelude to repairs. Moreover, the testing of the hydraulic unit for defects was also found dutiable as a survey conducted to ascertain whether repairs were necessary. Although the invoice indicated that the hydraulic unit was "OK," certain related parts and jointings were either repaired or renewed. Therefore, the cost of the testing was dutiable.

We emphasize that the holding exempts from duty only the cost of a required scheduled inspection by a qualifying entity (such as the U.S. Coast Guard or the ABS). In the liquidation

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process, Customs should go beyond the mere labels of "continuous" or "ongoing" before deciding whether a part of an ongoing maintenance and repair program labeled "continuous" or "ongoing" is dutiable.

Moreover, we note that C.S.D. 79-277 does not exempt repair work done by a shipyard in preparation of a required survey from duty. Nor does it exempt from duty the cost of any testing by the shipyard to check the effectiveness of repairs found to be necessary by reason of the required survey.

In regard to the tailshaft survey in question (Summary Note I(198)), upon reviewing ABS Invoice No. 16613849364 and ABS Report No. KS8106(A-H), it is readily apparent that the it was a required survey necessary for the vessel to retain its class with the ABS. The cost of the tailshaft survey is therefore nondutiable. With respect to the survey of the structural modifications (Summary Note M(204)), upon reviewing ABS Invoice No. 16613849364 and ABS Report No. KS 8107, it is readily apparent that the survey was done pursuant to the nondutiable modifications discussed above. Surveys done pursuant to nondutiable modifications are likewise nondutiable. (Customs ruling 111324) Accordingly, the costs of the surveys of structural modifications are nondutiable.

HOLDINGS: 1. Evidence is presented sufficient to prove that the foreign shipyard work described in Items 1, 2, 3 and 4 specified for our review constitute modifications to the hull and fittings of the vessel so as to render the work nondutiable under 19 U.S.C.  1466. Items 5 and 6 specified for our review are not modifications but rather are dutiable repairs.

2. The administrative costs appearing throughout the shipyard invoice are not dutiable under 19 U.S.C.  1466.

3. The costs of the ABS surveys described in Item 8 (Summary Notes I(198) and M(204)) are not dutiable under 19 U.S.C.  1466.

Sincerely,

William G. Rosoff
Chief
Entry and Carrier Rulings Branch