VES-3-18-RR:BSTC:CCI H099116 GOB
Supervisory Import Specialist
c/o Vessel Repair Unit
U.S. Customs and Border Protection
1515 Poydras Street, Suite 1700
New Orleans, LA 70112
RE: 19 U.S.C. §1466; Vessel Repair Entry NB3-4821068-4; Protest 2002-10-100004; LYKES LIBERATOR, V-068W
Dear Sir:
This is in response to your memorandum of March 19, 2010, forwarding for our review the above-referenced protest filed on behalf of Hapag-Lloyd USA, LLC and Marine Transport Management, Inc. (jointly referred to as the “protestant”) with respect to Vessel Repair Entry NB3-4821068-4. Our ruling follows.
FACTS:
The LYKES LIBERATOR (the “vessel”), a U.S.-flag vessel, incurred foreign shipyard costs. The vessel arrived in the port of Charleston, South Carolina on August 22, 2004. A vessel repair entry was timely filed.
Your office issued a letter of duty determination on October 16, 2009 with respect to the application for relief. A protest was subsequently filed seeking relief from duty on numerous expenditures.
ISSUE:
Whether the costs for which the protestant seeks relief are dutiable under 19 U.S.C. § 1466?
LAW AND ANALYSIS:
Initially, we note that the information in the file indicates that the protest, with application for further review, was timely filed under the statutory and regulatory provisions for protests. 19 U.S.C. § 1514(c)(3) and 19 CFR § 174.12(e).
Title 19, United States Code, section 1466 (19 U.S.C. § 1466) provides for the payment of duty at a rate 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 be employed in such trade.
In Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (Fed. Cir. 1994), aff’g 815 F.Supp. 1484 (Ct. Int'l Trade 1993), the court stated in pertinent part as follows with respect to the reach of 19 U.S.C. § 1466:
Texaco urges us to reject the Court of International Trade’s “but for” approach and to interpret “expenses of repairs” so as to exclude those expenses (e.g., expenses for clean-up and protective covering work) not incurred for work directly involved in the actual making of repairs. Such a reading has no basis in the plain language of the statute, however. Aside from the inapplicable statutory exceptions, the language “expenses of repairs” is broad and unqualified. As such, we interpret “expenses of repairs” as covering all expenses (not specifically exempted in the statute) which, but for dutiable repair work, would not have been incurred. [Emphases supplied.]
In SL Service, Inc. v. United States, 357 F.3d 1358 (Fed. Cir. 2004), rev’g 244 F. Supp. 1359 (Ct. Int’l Trade 2002), cert. denied December 13, 2004, the Court of Appeals for the Federal Circuit upheld the Customs and Border Protection (“CBP”) proration of certain shipyard expenses. The court stated in pertinent part as follows:
. . . apportionment is consistent with section 1466(a) and the “but for” test. In the context of dual-purpose expenses, it is rational to impose the duty on only that portion of the expense that is fairly attributable to the dutiable repairs. Indeed, to impose the 50% ad valorem duty on the entire costs of dry-docking in this case would exceed the mandate of the statute. The logical appeal of apportionment has been recognized in other areas of the law . . .
. . .
Customs’ long-standing practice of apportioning the cost of various expenses between dutiable repairs and non-dutiable inspections and modifications comports with both the statute and common sense.
In its administration of the vessel repair statute, CBP has held that modifications, alterations, or additions to the hull of a vessel are not subject to vessel repair duties. The identification of work constituting modifications vis-à-vis work constituting repairs has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a nondutiable modification, the following factors have been considered. These factors are not by themselves necessarily determinative, nor are they the only factors which may be relevant in a given case. However, in a given case, these factors may be illustrative, illuminating, or relevant with respect to the issue as to whether certain work may be a modification of a vessel which is nondutiable under 19 U.S.C. § 1466:
1. Whether there is a permanent incorporation into the hull or superstructure of a vessel, either in a structural sense or as demonstrated by means of attachment so as to be indicative of a permanent incorporation. See United States v. Admiral Oriental Line, 18 C.C.P.A. 137 (1930). However, we note that a permanent incorporation or attachment does not necessarily involve a modification; it may involve a dutiable repair or dutiable equipment.
Whether in all likelihood an item would remain aboard a vessel during an extended lay-up.
3. Whether an item constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function.
Whether an item provides an improvement or enhancement in operation or efficiency of the vessel.
Additionally, we note that in order to qualify as a nondutiable modification rather than a repair the documentation of record must reflect that the element which was replaced was in good and full working order at the time the work was performed.
In its administration of the vessel repair statute, CBP has frequently used the following definitions:
Equipment – An article which constitutes an operating entity unto itself. Equipment retains at least the potential for portability. Equipment may be affixed to a vessel in a non-permanent fashion, such as by means of bolts or other temporary methods, which is a feature distinguishing it from being considered an integrated portion of the hull and superstructure of a vessel. Examples would include winches and generators.
Material – An item which is consumed in the course of its use and/or loses its identity as a distinct entity when incorporated into the larger whole, e.g., paint and sheets of steel.
Part – An article which does not lose its essential character or its identity as a distinct entity but which, like materials, is incorporated into a larger whole. It would be possible to disassemble an apparatus and still be able to identify a part. Examples would include piston rings and pre-formed gaskets.
You request our review with respect to the items discussed below.
Item 210. Hull Markings. The shipyard invoice provides in pertinent part as follows: “A) Prior to hull cleaning and painting, record all Draft, Load Line, Plimsoil, Tug Bulkhead, Propeller, Bow Thruster and other identifying marks. When hull coating is complete, vessel’s name, hailing port, draft numerals, tank separation lines, bulbous bow, plimsoil marks, etc. on ship’s sides and stern given two (2) coats of Owner furnished white/black marking paint…. B) IMO Marking: One (1) each, new 400 mm IMO number stamped and painted below hailing port on stern.” The protestant states that “[t]he aggregated costs all pertain to labor and materials in connection with a non-dutiable modification.” At least certain of the work on this invoice is dutiable as incident to dutiable cleaning and coating, i.e., the work described in “A,” above. There is no breakdown of costs on the invoice between dutiable and nondutiable work. Absent such a breakdown, CBP has long-held that duty is to be assessed on the full cost of the item on the invoice. (See, for example, C.I.E. 565/55.) Therefore, we find that this cost is dutiable, as it includes repair and/or maintenance work.
Item 400. Anchor Chains. This item includes ranging and chain locker cleaning. The shipyard invoice provides in pertinent part as follows: “High pressure water wash/grit sweep chain and anchors removing all scale and debris … Allow to grit blast both anchors to SA 2.0 standard and apply two (2) coats of Owner furnished epoxy paint…. While chains are removed, clean and muck out chain locker bottoms…” The protestant states that “[t]his item includes labor to prepare the anchors and chains for inspection.” Certain work involved on this item is dutiable, i.e., the gritblasting and application of the epoxy paint. There is no breakdown of costs on this invoice between dutiable and nondutiable work. Absent such a breakdown, CBP has long-held that duty is to be assessed on the full cost of the item on the invoice. (See, for example, C.I.E. 565/55.) Therefore, we find that this cost is dutiable as it includes repair and/or maintenance work.
Item 410. Engine/Bow Thruster Control Consol – Port/Starboard Bridge Wings. The shipyard invoice provides in pertinent part as follows: “Modify the ship by removing, and relocating the Bridge Wing Control Consoles 800 mm inboard. New consoles to be fabricated and installed. The steel deck of the bridge wings to be modified to delete the old foundation and provide a new foundation for the new consoles. Delivery of two new st. steel bridge control panels.” The protestant states: “The new design and configuration of the bridge wing consoles facilitate improved use and access of the bridge way. The modification involved the removal of the existing consoles and their foundations, and the fabrication of new style consoles and foundations to accommodate the improved design.” We find that the protestant has not provided satisfactory documentary evidence in support of its claim that this work constitutes a nondutiable modification to the vessel. Therefore, this cost is dutiable under 19 U.S.C. § 1466.
Item 511. Oil-fired Boiler – Cladding and Insulation. The shipyard invoice provides in pertinent part as follows: “Removal of insulation and cladding. Delivery and installation of 2 layers of new insulation. Delivery and installation of new galvanized steel cladding.” The protestant claims that this item is a nondutiable modification to the vessel but it has not provided satisfactory documentary evidence in support of this claim. We find that this cost is a dutiable maintenance item. We held similarly in HQ 115690, dated August 19, 2002, where we determined that the removal and replacement of asbestos insulation was a dutiable repair/maintenance operation.
Item 518. Auxiliary Condenser – ABS Survey. The shipyard invoice provides in pertinent part as follows: “Disconnect and remove water boxes from condenser inlet/outlet and return water heads. Provide necessary lighting and ventilation for survey by ABS and remove upon completion. Rod out all tubes of debris and sea growth. Clean water boxes using high pressure (200 to 350 kg/cm) fresh water and blowout all tubes with HP water. Scrape and wire brush tube sheets/heads and allow for coating of some fifty (50) square feet of bare steel areas with contractor furnished APEXIOR #3….” The protestant states: “This item includes labor to provide access to and to prepare the condenser for inspection by a classification society for a required survey … [The CBP duty determination] was likely based on erroneous language on the Shipyard invoice which stated that the tube sheets and heads were scraped to allow for coating with contractor-furnished APEXIOR #3. In fact, no repairs or coating were conducted. The above-referenced language was improperly in the invoice …” We find that this item is dutiable as it involves work that constitutes repairs and/or maintenance. Where the shipyard invoice is clear on its face, and where there is no clear statement from the shipyard that its invoice is incorrect, CBP cannot accept a statement in the protest that is not supported by documentary evidence. We find that the protestant has not provided satisfactory documentary evidence in support of its assertion. In HQ 114984, dated April 10, 2000, CBP stated:
Our analysis in this matter is based primarily on the pertinent invoices. The assertions of the protest, by themselves, are not considered to be satisfactory documentary evidence. In this regard, we note the statement of the court in Bar Bea Truck Leasing Co., Inc. v. United States, 5 CIT 124, 126 (1983):
Again, plaintiff has presented no affidavit or other evidence in support of its counsel’s bald assertion...
If we are unable to determine the precise nature of certain work because of the lack of clear and probative documentary evidence, and are thus unable to determine that it is nondutiable, such work will be found dutiable.
Item 627. Inspections – Main Engine. The shipyard invoice provides for the measurement and recording of bearing clearances of the main engine camshaft; the hydraulic tensioning and recording with respect to the main engine tie rods and stay bolts, the main engine side stay bolts, and the main engine foundation bolts; and the inspection, measurement, and recording with respect to the main engine timing chain. We find that this cost is nondutiable as it does not involve dutiable repairs or maintenance.
Item 916. Base Plate for Gyro Compass. The shipyard invoice provides in pertinent part as follows: “As part of modification of gyro compass system fabricate one base plate for gyrocompass …” The protestant states: “Increased navigational, safety, and communications demands requires that ships employ a redundant digital gyro system. The installation of a new base plate is required to accommodate the redundant gyro system.” This issue, or this particular type of issue, has previously been thoroughly considered by CBP. See, for example, the discussion, including the authorities cited, in the following rulings: HQ 113798 dated January 9, 1997, where we found a radar system to be dutiable as vessel equipment; HQ 226688, dated July 29, 1997, where we found a radar system to be dutiable as vessel equipment; HQ 114092, dated September 12, 1997 (revoking HQ 111425), where we found a radar system and a satellite communications system to be dutiable as vessel equipment; HQ 114093, dated September 12, 1997, where we found a satellite communications system to be dutiable as vessel equipment; and HQ H052778, dated May 7, 2009, and H068756, dated August 5, 2009, where we found Furuno simplified voyage data recorders (“SVDRs”) to be dutiable under 19 U.S.C. § 1466(a) as vessel equipment. In these rulings, we considered whether the item at issue was a nondutiable modification to the vessel or the dutiable installation of vessel equipment. We concluded that the item at issue in each ruling was dutiable under the vessel repair statute as vessel equipment. We find similarly in this entry and protest – the base plate for the gyro compass is dutiable under 19 U.S.C. § 1466(a) as part of vessel equipment.
Item 919. Funnel Wings Modification. The shipyard invoice provides in pertinent part as follows: “Modify the ship by permanently deleting the funnel wings from the ship to reduce maintenance costs.” The protestant states:
“… the modification via the deletion of all redundant air flow devices was undertaken to improve the operation and efficiency of the vessel by deleting an unnecessary component and reducing future maintenance costs.” We find that this cost is nondutiable as it does not involve repairs. CBP has long-held that the mere removal of articles from a vessel, without more, is not dutiable under 19 U.S.C. § 1466. See HQ 114493, dated November 17, 1998, and rulings cited therein.
Item 923. Scandinavian Boiler Service, Assistance with Boiler Modifications. The shipyard invoice provides that this item involved “[s]hipyard assistance and supply of material … to accomplish boiler modifications.” The protestant states: that this item “… was for the costs associated with the Shipyard support of owner’s subcontractor (SBS) in connection with modifications to the Vessel’s boiler refractory, including furnishing welding machines, shore power, transportation and carnage in addition to minor fabrication work.” We find that the protestant has not submitted satisfactory documentary evidence in support of its claim of nondutiability. Therefore, this cost is dutiable under 19 U.S.C. § 1466.
OFM N/D-10. SBS Invoice 616. The SBS invoice indicates that this cost was for the installation of the refractory, including support and tubes. The protestant states that this cost “… was for the costs associated with the parts and labor supplied by SBS in connection with the work performed to modify the Vessel’s boiler refractory system.” We find that the protestant has not submitted satisfactory documentary evidence in support of its claim of nondutiability. Therefore, this cost is dutiable under 19 U.S.C. § 1466.
OFM N/D-11. Klein Associates, Inc. Invoices 41678, 42052, and 42059. Installation of Digital Gyro Compass. The invoices indicate that these costs are for the digital gyro compass and its installation (and also a transducer, repeater compass, and digital repeater). The protestant states that these costs are for a nondutiable modification to the vessel. We find that the digital gyro compass and the related costs are equipment of the vessel. Therefore, these costs are dutiable under 19 U.S.C. § 1466 as vessel equipment. (See the discussion above relative to item 916, base plate for gyro compass.)
HOLDING:
The costs for which the protestant seeks relief are dutiable or nondutiable under 19 U.S.C. § 1466, as discussed in the Law and Analysis section of this ruling.
You are instructed to grant the protest in part and deny the protest in part with respect to the costs discussed in this ruling.
In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2007), you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any final duty determination of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Glen E. Vereb
Chief
Cargo Security, Carriers and Immigration Branch