VES-13-18-RR:IT:EC 115160 LLO
Chief, Liquidation Branch
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94126
RE: Vessel Repair Entry No. C32-0010881-0; Petition for Review;
Proration; MATSONIA; V-810; 19 U.S.C. §1466
Dear Sir:
This is in response to your memorandum dated September 18, 2000, which forwards for our consideration a petition for review from vessel repair duties assessed pursuant to 19 U.S.C. §1466. Your office requests our review with respect to certain of the applicant’s claims. Our findings are set forth below.
FACTS:
The MATSONIA is a U.S.-flag vessel owned by Matson Navigation Company which incurred foreign costs in September and October of 1999. Subsequent to the completion of the work, the vessel arrived at the Port of Honolulu, Hawaii, on October 23, 1999. A vessel repair entry, application for relief, and petition for review have been timely filed.
ISSUES:
1) Whether Items # 00, 9.7, and change order #38 contained within the subject vessel entry are dutiable under 19 U.S.C. §1466.
2) How pro-ration is properly calculated under 19 U.S.C. §1466.
LAW AND ANALYSIS:
Title 19 United States Code, §1466 (19 U.S.C. §1466), provides in pertinent part for the payment of an ad valorem duty of 50 percent of the 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 upon a vessel documented under the laws of the United States…”
On March 3, 1995, the Assistant Commissioner, Office of Regulations and Rulings, issued a memorandum that was published in the Customs Bulletin on April 5, 1995 (Customs Bulletin and Decisions vol. 29, no. 14 at pg. 24). It provided that all vessel repair entries filed with Customs on or after the date of that decision were to be liquidated in accordance with the full weight and effect of the court decision. See, Texaco Marine Services, Inc. v. United States, 44 F.3d 1539 (1994). That decision states that costs of post repair cleaning and protective coverings incurred pursuant to dutiable repairs, are dutiable and all other foreign expenses contained within such entries are subject to the “but for” test. For vessel repair entries filed before December 29, 1994, all costs for post-repair cleaning and protective covering incurred pursuant to dutiable repairs are dutiable.
In this petition, the petitioner alleges that the price of the additional insurance premium, that was found to be dutiable in the application for review, was not a shipyard overhead cost, contrary to its initial belief. The petitioner further argues that it could have purchased the same excess insurance and such purchase of insurance would not have been subject to any duty. The petitioner claims that investigation with the shipyard has revealed that it was a “pass-through” cost, and that therefore, the “pass-through” cost should be interpreted as equally obtainable by the petitioner without duty, and should not be treated as a ship repair cost, and thus subject to duty.
In our case number 112442, we confirmed our earlier finding that insurance costs are included in the category of overhead and administrative expenses, of the type which are subject to proration as are general services and drydocking charges. Therefore, if such insurance costs are strictly allocable to either dutiable or to free operations they would take either a dutiable or free status. If however, they are associated with mixed costs, they are subject to proration under our established formula.
Secondly, the petitioner alleges that the garage roof is a permanently installed structure containing previously non-existent features. The petitioner argues that this new permanent, previously non-existent capability qualifies this item for remission of duty under 19 U.S.C. §1466. Over the course of years, the identification of modification processes has evolved from judicial and administrative precedents. In considering whether an operation has resulted in a modification, which is not subject to duty, the following elements may be considered:
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.
Whether an item under consideration provides an improvement or enhancement in operation or efficiency of the vessel.
Before an item is to be construed as a part of the vessel, it must be 1) a permanent attachment and 2) essential to the successful operation of the vessel. Otte v. U.S., 7 C.C.P.A. 166, 169 (1916). The appropriate inquiry to determine whether a particular replacement operation is a modification as opposed to a repair is to analyze the condition of the structure(s) prior to being replaced. Customs has determined that even though an operation might, under normal circumstances, be considered a permanent duty-free modification, the benefit of such a finding is not extended to operations which encompass the replacement of existing structure(s) that are in need of repair at that time. If a permanent addition is a first time installation, or if it replaces an existing structure that is in good working order at the time of its replacement and an enhancement in operating efficiency is provided, the operation may be considered a duty free modification. (HQ 112779)
Item 9.7, the garage roof, was apparently done in order to ”…replace a temporary type of roof that was found to be unsatisfactory under operating conditions and which resulted in damage (automobiles).”
While the structure may have been inadequate in providing protection, this does not necessarily indicate that it was in need of repair. It would appear that the design itself was problematic. The new structure is permanent and provides an operational improvement over the serviceable but inadequately designed structure which preceded it. Therefore, we find the new addition to be a qualifying modification.
The petitioner goes on to argue that since no repairs were performed on the rudder, only installation of instrumentation to the rudder, this installation should be duty free. The petitioner’s reasoning behind the argument is that 19 U.S.C. §1466 imposes duty on repairs, it does not appear that the intent of the statute is to assess duty on services provided to install informational equipment. In this situation there is no indication of the rudder having been in poor working condition prior to the “installation of instrumentation” that will presumably enhance the operating efficiency of the rudder and to the vessel in overall operations. Additionally, the rudder is a permanent attachment to the vessel. This being the case, the installation of instrumentation to the rudder constitutes a duty free modification under 19 U.S.C. §1466.
HOLDING:
Following a thorough review of the facts in this case as well as an analysis of the law and applicable precedents that bear upon those facts, we have determined that the Petition for Review should be granted in part and denied in part for the reasons set forth in the Law and Analysis section of this ruling. The petitioner should be informed of the right to file a protest following liquidation of this entry, as evidence by the posting of the bulletin notice of liquidation.
Sincerely,
Larry L. Burton
Chief
Entry Procedures and Carriers Branch