VES-13-01/18-RR:IT:EC 113689 GEV
Chief, Liquidation Branch
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94126
RE: Vessel Repair Entry No. C28-0200669-5; M/V STRONG VIRGINIAN;
Modification; Survey; Equipment; 19 U.S.C.
1466
Dear Sir:
This is in response to your memorandum dated December 21,
1995, forwarding an application for relief from duties assessed
pursuant to 19 U.S.C. 1466 with supporting documentation. You
request our review of three items (nos. 3, 100, and 165 listed on
the spreadsheets) contained within the above-referenced vessel
repair entry. Our findings in this matter are set forth below.
FACTS:
The M/V STRONG VIRGINIAN is a U.S.-flag vessel operated by
Strong Virginian Navigation Company. Subsequent to the
completion of various foreign shipyard work, the vessel arrived
in the United States at Oakland, California, on July 19, 1995. A
vessel repair entry and an application for relief with supporting
documentation were timely filed. Included in the work performed
are the following items for which our review is sought:
Item No. Description
3 The cost of a crane barge and
assisting tug
pursuant to a test of the vessel's
lifting gear.
100 Turbocharger modification.
165 Turbocharger costs.
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In support of its claim that the above-listed items are
nondutiable, the applicant has submitted various documentation
including invoices, letters and diagrams.
ISSUES:
1. Whether the cost of the crane barge and assisting tug
covered by Item 3 is dutiable under 19 U.S.C. 1466.
2. Whether evidence is presented sufficient to prove that
the work covered by Item 100 constitutes a modification to the
hull and fittings of the vessel so as to render the work
nondutiable under 19 U.S.C. 1466.
3. Whether the turbocharger costs covered by Item 165 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.
Item 3 covers the cost of a floating crane barge (SEMCO L88)
and an assisting tug which, pursuant to Semco Salvage & Marine
PTE. LTD. invoice no. 44-3376, were necessary "...to carry out
bollard pull test on vessel..." In support of its claim the
applicant cites to C.S.D. 79-277 and has submitted a letter from
Germanischer Lloyd (USA), Inc. (the North American representative
of Germanischer Lloyd) which provides, in pertinent part, as
follows:
"According to the requirements of this Society and to
ILO Convention
No. 152, for lifting appliances, a quinquennial
thorough examination is
required five years after the initial examination and
every five years
thereafter."
The letter further provides that, "...the actual examination
and test was [sic] carried out with satisfactory result on 20
August 1994, using water-filled barge SEMCO L88 as test weight."
In regard to the dutiability of inspection/survey costs, we
note that C.S.D. 79-277 stated 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."
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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
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.
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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 Item 3, the documentation submitted indicates
that the charges for the crane barge and assisting tug were
incurred pursuant to, and necessary for, a required periodical
survey by a qualifying entity. Consequently, we find Item 3 to
be nondutiable.
Item 100 covers work alleged to be a modification of a
turbocharger. In regard to this claim, we note that 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
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.
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"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).
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 documentation pertaining to Item 100, we
note that notwithstanding the single word "MODIFICATION"
appearing on the invoice, the remainder of that document is
devoid of any details or descriptions of the work that would
support such a conclusion. Furthermore, the word "(OVERHAUL)"
appears next to the word "MODIFICATION" on the invoice which
contradicts rather than supports the latter and provides an
indicia of a dutiable repair. Accordingly, in the absence of
sufficient evidence to support a modification claim, Item 100 is
dutiable.
Item 165 covers the transpiration and assembly of a
turbocharger. The record is devoid of any evidence to indicate
that this item is other than a dutiable purchase of equipment.
Accordingly, Item 165 is dutiable.
HOLDINGS:
1. The cost of the crane barge and assisting tug covered by
Item 3 is not dutiable under 19 U.S.C. 1466.
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2. The evidence presented is insufficient to prove that the
work covered by Item 100 constitutes a modification to the hull
and fittings of the vessel so as to render the work nondutiable
under 19 U.S.C. 1466. Accordingly, Item 100 is dutiable.
3. The turbocharger costs covered by Item 165 are dutiable
under 19 U.S.C. 1466.
Sincerely,
Chief
Entry and Carrier Rulings Branch