VES-3-18-OT-RR:BSTC:CCR H269349 WRB
Mr. Neal Dewing
Maersk Line, Limited
One Commercial Place
20TH Floor
Norfolk, VA 23510
RE: 19 U.S.C. § 1466; MAERSK KOWLOON-Class vessels
Dear Mr. Dewing:
This is in response to your letter of September 21, 2015, requesting an advisory ruling on behalf of Maersk Lines, Ltd., (hereinafter “Maersk” or “MLL”) to determine whether the proposed work described below will constitute modifications for the purposes of 19 U.S.C. § 1466 (the “Vessel Repair Statute”). Our advisory ruling is set forth below.
FACTS
You seek our advice with respect to proposed modifications of the eight vessels of the MAERSK KOWLOON-class, respectively the M/Vs MAERSK ATLANTA, MAERSK CHICAGO, MAERSK COLUMBUS, MAERSK DENVER, MAERSK DETROIT, MAERSK HARTFORD, MAERSK KENSINGTON, MAERSK KINLOSS, MAERSK MEMPHIS, and MAERSK PITTSBURGH (hereinafter, the “vessels”). Maersk proposes to carry out two different types of modifications on the vessels; capacity increase measures, and fuel consumption reduction measures.
Capacity Increase Measures: the proposed capacity increase measures include elevation of the vessel’s lashing bridges, increase of deck stack weight capacity, scantling draught increase, and wheelhouse elevation.
a. Elevation of Lashing Bridges: Maersk states that an additional tier of lashing bridges will be installed on top of the existing lashing bridges to increase container carrying capacity through greater container stack heights. The current lashing bridges are one tier high. Accordingly, containers are lashed to the lashing bridges from the upper corners of the second tier containers and from the bottom corners of the third tier containers, as illustrated in the graphic below, provided by Maersk:
Maersk proposes to elevate the vessels’ lashing bridges by installing one additional tier on top of the existing lashing bridges. This modification will provide better support to the container stack permitting containers to be stacked higher on deck. Maersk further asserts that the existing lashing bridges are in good and full working order and are not being replaced.
b. Increase of deck stack weight: Maersk proposes to reinforce the vessels’ hatch covers, and potentially hatch coamings, to increase the vessels’ current on-deck forty-foot container stack weight limit from 120 tons to 150 tons to enable greater container carrying capacity. Maersk further asserts that the existing hatch covers and coamings are in good and full working order and are not being replaced.
c. Scantling draught increase: Maersk proposes to reinforce the hull to increase the scantling draught from 14.5 to 15.0 meters to raise the deadweight in order to safely accommodate greater container carrying capacity. Maersk asserts that the vessels’ hulls are in good and full working order and are not being replaced.
d. Wheelhouse elevation: in order to fulfill International Maritime Organization visibility requirements when containers are loaded higher on deck, Maersk contemplates elevating the wheelhouse. The existing wheelhouse will be cut at the captain’s deck and elevated by installing a spacer block between the wheelhouse and captain’s deck. Maersk states that the spacer block is not replacing any element of the vessel. The new spacer block will be part of the deckhouse, as illustrated by the photo below taken from a similar conversion on another ship series, provided by Maersk.
Fuel Consumption Reduction Measures: Maersk contemplates optimizing the hull and propulsion plant to a lower operational speed than that for which the vessels were originally designed in order to reduce fuel consumption. Accordingly, Maersk plans to replace the vessels’ bulbous bows and propellers, install Becker Twisted Fins energy saving devices, and limit the main engines’ power output.
a. Replacement of bulbous bow: The vessels’ bulbous bows will be replaced with a smaller bulbous bow design to reduce fuel consumption at the slower speeds required for the vessel’s proposed operational profile. The current bulbous bow is too large for the contemplated reduced operational speed. Maersk asserts that the bulbous bows being replaced are in good and full working order, but are too large and inefficient for the vessels’ operational profile. The replacement of bulbous bows is depicted in the photograph below taken from a similar conversion on another vessel series, provided by Maersk.
b. Replace propellers: the vessels’ current propellers are designed for their present top speed. The propellers will be replaced with a smaller propeller design to reduce fuel consumption at the slower speeds required for the vessel’s contemplated operational profile. Reducing the vessels’ top speed by limiting the main engine maximum output power will allow the vessels to achieve a higher efficiency, reducing the required propeller blade area. Maersk asserts that the propeller being replaced is in good and full working order, but is too large and inefficient for the vessel’s actual operational profile.
c. Installation of Becker Twisted Fins Energy Saving Devices: Maersk proposes the installation of a Becker Twisted Fins (BTF) energy saving device on each vessel to improve fuel efficiency and reduce greenhouse gas emissions. There are no propeller efficiency increasing devices installed on the vessels. Maersk argues that the BTF represents an improvement or enhancement to the vessel which will reduce fuel consumption and emissions. The proposed BTF will control water flow to the vessels’ propellers to increase efficiency. In the BTF installation, a nozzle ring structurally supports the fins and generates forward thrust mitigating the negative effect of drag from the BTF installation, resulting in lower fuel oil consumption and reduced emissions. Maersk asserts that the BTFs installed on the vessels will be permanently incorporated and will remain aboard the vessel during an extended lay-up, and that they are a new design feature that does not replace any other item onboard.
d. Engine Power Limitation Software Installation: Maersk proposes to limit the vessels’ main engine power (Specified Maximum Continuous Rating or SMCR) to protect the propeller from overload as a consequence of installing new propellers designed to a lower maximum power. The engine limitation will be accomplished by software change, which will be installed in the vessel’s automated systems, updating the existing software. Maersk asserts that the current software is in good and full working order for the vessel’s current operating profile, and that the installed software will remain aboard during extended lay-up. Maersk further argues that the software change represents an improvement or enhancement to the vessel to reduce fuel consumption and emissions.
ISSUE
Whether the work described above constitutes modifications to the subject vessels under 19 U.S.C. § 1466?
LAW AND ANALYSIS
Title 19, United States Code, section 1466(a) provides for the payment of duty at a rate of fifty percent ad valorem on the cost of foreign repairs to and equipment for 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 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. See HQ 111425 (June 26, 1991); HQ 111747 (Feb. 19, 1992); and HQ 113127 (June 14, 1994). 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 modification, several 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 under 19 U.S.C. § 1466. The factors are:
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, citing Otte v. United States, and 27 Op. Atty Gen. 228. However, we note that a permanent incorporation or attachment may not necessarily involve a modification; it may involve a dutiable repair or dutiable equipment.
2. 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.
4. 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 modification, rather than a repair, the documentation of record must reflect that the element which was replaced, if any, was in good and full working order at the time the work was performed. Upon reviewing your letter of September 21, 2015, and the supporting documentation provided, we note that CBP has consistently ruled that newly designed systems and components permanently installed on a vessel, which would remain on board the vessel during extended layup, do not replace an item in need of repair, and will improve the operation or efficiency of the vessel are considered modifications. See e.g., HQ 114093 (Sept. 12, 1997); HQ H143219 (Feb. 22, 2011); and, HQ 116627 (Mar.16, 2006).
The most recent judicial examination of the differentiation between repairs and modifications for the purposes of 19 U.S.C. § 1466 was the opinion of the U.S. Court of Appeals for the Federal Circuit in Horizon Lines. The Federal Circuit noted, citing Admiral Oriental, “Section 1466 does not impose a duty upon alterations of ship design that constitute modifications rather than repairs.” The Federal Circuit further favorably cited the language of the Court of International Trade in the litigation below, saying, “the term ‘repairs’ describes work putting something that has sustained damage back into working condition whereas the term ‘modifications’ describes work addressing a problematic feature.” The Horizon Lines court provided the yardstick to be used in the differentiation between repairs and modifications, when it said:
The plain meaning of “repair” describes putting something that has sustained damage back into working condition. It requires “restoration after decay, waste, injury, or partial destruction”—all of which indicates that the part being repaired was damaged— which necessitated the repair. Thus, the prior condition of a part that is removed or replaced during work on a vessel is relevant to whether that work constitutes a repair. We do not conclude, however, that the prior condition is always dispositive of whether work constitutes a repair or modification. We note that there would be no need to repair a part that is in working order.
Accordingly, we are required to make a detailed factual determination of whether proposed modifications constitute repairs, based upon the prior condition of any part that is removed or replaced during work on a vessel.
CAPACITY INCREASE MEASURES
Elevation of Lashing Bridges: considering the first factor, whether there is a permanent incorporation into the hull or superstructure, the nature of the work to be done to the vessels’ hulls and fittings is such that it would constitute a permanent incorporation into the vessels. The elevation of the lashing bridges would install a new layer of material atop the existing layer of lashing bridges by permanent methods, welding.
Regarding the second factor, whether, in all likelihood, an item would remain aboard a vessel during an extended lay-up, the nature of the work to be done to the hulls and fittings is such that it indicates that the contemplated items would remain aboard a vessel during an extended lay-up. The new lashing bridges proposed for installation would be permanently incorporated into the vessels’ structures. They would not be portable or capable of being removed from the vessels without significant effort and possible structural damage.
The third factor of our analysis, whether an item constitutes a new design feature and is not merely replacing a part, fitting, or structure that is performing a similar function, the nature of the proposed work indicates that a modification is contemplated. Although the lashing bridges would replicate the function of the existing bridges, the addition of the additional layer of bridges would be a new design feature.
On the subject of whether an item provides an improvement or enhancement in operation or efficiency of the vessel, the proposed extension of the lashing bridges would provide better support to the vessels’ container stacks, permitting containers to be loaded higher on deck. The ability to carry more containers on deck would constitute an improvement or enhancement in operation of the vessel.
Based upon the information provided by Maersk and after consideration each of the four factors, we are of the opinion that that the proposed work would meet the above-discussed criteria for vessel modifications.
Increase of Deck Stack Weight Capacity: considering the first factor, whether there is a permanent incorporation into the hull or superstructure, the nature of the work to be done to the vessels’ hulls and fittings is such that it would constitute a permanent incorporation into the vessels. Increasing the deck stack weight capacity from 120 tons to 150 tons would require the reinforcement of the hatch covers and hatch coamings by permanent means, principally welding of additional steel.
Regarding the second factor, whether, in all likelihood, an item would remain aboard a vessel during an extended lay-up, the nature of the work to be done to the hulls and fittings is such that it indicates that the contemplated items would remain aboard a vessel during an extended lay-up. The new steel proposed for installation during the reinforcement of the hatch covers and hatch coamings would be permanently incorporated into the vessels’ structures, and would not be portable or capable of being removed from the vessels without significant effort and possible structural damage.
The third factor of our analysis, whether an item constitutes a new design feature and is not merely replacing a part, fitting, or structure that is performing a similar function, the nature of the proposed work indicates that a modification is contemplated. Although the vessels would still carry containers on deck, the carrying capacity increase would allow more containers to be carried, a feature absent in the current vessel design.
On the subject of whether an item provides an improvement or enhancement in operation or efficiency of the vessel, the proposed work would be carried out for the purpose of increasing container carrying capacity. It would improve the operation of the vessels by improving the ability to carry cargo.
Based upon the information provided by Maersk and after consideration each of the four factors, we are of the opinion that that the proposed work would meet the above-discussed criteria for vessel modifications.
Scantling Draught Increase: considering the first factor, whether there is a permanent incorporation into the hull or superstructure, the nature of the work to be done to the vessels’ hulls and fittings is such that it would constitute a permanent incorporation into the vessels. The scantling draught increase would increase the vessels’ deadweight, requiring reinforcement of the hull.
Regarding the second factor, whether, in all likelihood, an item would remain aboard a vessel during an extended lay-up, the nature of the work to be done to the hulls is such that it indicates that the contemplated items would remain aboard a vessel during an extended lay-up. The new steel used to reinforce the hull would be permanently incorporated into the vessels’ structures. None of the new steel would be portable or capable of being removed from the vessels without significant effort and possible structural damage.
The third factor of our analysis, whether an item constitutes a new design feature and is not merely replacing a part, fitting, or structure that is performing a similar function, the nature of the proposed work indicates that a modification is contemplated. As described above, the scantling draught increase would result in an increase in the vessels’ deadweight.
On the subject of whether an item provides an improvement or enhancement in operation or efficiency of the vessel, the proposed work would be carried out for the purpose of accommodating the vessels’ increased container carrying capacity.
Based upon the information provided by Maersk and after consideration each of the four factors, we are of the opinion that that the proposed work would meet the above-discussed criteria for vessel modifications.
Wheelhouse Elevation: considering the first factor, whether there is a permanent incorporation into the hull or superstructure, the nature of the work to be done to the vessels’ hulls and fittings is such that it would constitute a permanent incorporation into the vessels. The elevation of the wheelhouse would require cutting existing wheelhouse at the captain’s deck, raising the wheelhouse, and installing a spacer block between the wheelhouse and captain’s deck. The new spacer block would be part of the deckhouse. The spacer block would be permanently integrated into the vessels’ structures via welding.
Regarding the second factor, whether, in all likelihood, an item would remain aboard a vessel during an extended lay-up, the nature of the work to be done to the hulls and fittings is such that it indicates that the contemplated items would remain aboard a vessel during an extended lay-up. The new spacer block in the deckhouse proposed for installation would be permanently incorporated into the vessels’ structures by welding and other permanent means, and would not be portable or capable of being removed from the vessels without significant effort and possible structural damage.
The third factor of our analysis, whether an item constitutes a new design feature and is not merely replacing a part, fitting, or structure that is performing a similar function, the nature of the proposed work indicates that a modification is contemplated. Although the wheelhouse in its elevated position would accomplish the same general purpose, the proposed new location would constitute a new and improved design, allowing the vessels to meet International Maritime Organization visibility requirements when containers are loaded higher on deck, further facilitating increased cargo carrying capacity.
On the subject of whether an item provides an improvement or enhancement in operation or efficiency of the vessel, the proposed work would be carried out for the purpose of enhancing cargo carrying capacity. It would improve the operation of the vessels by providing improved visibility over higher container stacks, allowing more containers to be carried on deck. This improved visibility would aid the operation of the vessels.
Based upon the information provided by Maersk and after consideration each of the four factors, we are of the opinion that that the proposed work would meet the above-discussed criteria for vessel modifications.
FUEL CONSUMPTION REDUCTION MEASURES
Replacement of Bulbous Bows: considering the first factor, whether there is a permanent incorporation into the hull or superstructure, the nature of the work to be done to the vessels’ hulls and fittings is such that it would constitute a permanent incorporation into the vessels. The replacement of the vessels’ bulbous bows would require the removal of the vessels’ extant bow bulbs, and installing new bulbs of a different type and design. The new bulbous bows proposed for installation would be permanently incorporated into the vessels’ hulls by welding. The conversion would also involve structural changes to accommodate the new bulbous bows.
Regarding the second factor, whether, in all likelihood, an item would remain aboard a vessel during an extended lay-up, the nature of the work to be done to the hulls and fittings is such that it indicates that the contemplated items would remain aboard a vessel during an extended lay-up. The new bulbous bows proposed for installation would be permanently incorporated into the vessels’ hulls below the waterline by welding. The new bulbous bows would not be portable or capable of being removed from the vessels without significant effort, including drydocking the vessels, and possible structural damage.
The third factor of our analysis, whether an item constitutes a new design feature and is not merely replacing a part, fitting, or structure that is performing a similar function, the nature of the proposed work indicates that a modification is contemplated. Although the removed bulbous bows would be replaced with new bulbous bows with the same general purpose, the proposed new bulbs would be of a new and improved design to support operation of the vessels at the contemplated reduced operational speed.
On the subject of whether an item provides an improvement or enhancement in operation or efficiency of the vessel, the proposed work would be carried out for the purpose of improving fuel and operational efficiency. It would improve the operation of the vessels by providing improved fuel consumption, and would aid the continued operation of the vessels.
Based upon the information provided by Maersk and after consideration each of the four factors, we are of the opinion that that the proposed work would meet the above-discussed criteria for vessel modifications.
Replacement of Propellers: Considering the first factor, whether there is a permanent incorporation into the hull or superstructure, the nature of the work to be done to the vessels’ hulls and fittings is such that it would constitute a permanent incorporation into the vessels. The replacement of the vessels’ propellers would require the removal of the extant propellers, and installing new ones of a different type and design. The propellers proposed for installation would be as permanently incorporated into the vessels’ as any moving piece of machinery can be, being mounted onto the propeller shafts below the waterline with large bolts. Removal of the propellers would require drydocking the vessels.
Regarding the second factor, whether, in all likelihood, an item would remain aboard a vessel during an extended lay-up, the nature of the work to be done to the propellers is such that it indicates that the contemplated items would remain aboard a vessel during an extended lay-up. The new propellers proposed for installation would be permanently attached to the vessels’ machinery. The propellers would not be portable or capable of being removed from the vessels without significant effort and possible damage.
The third factor of our analysis, whether an item constitutes a new design feature and is not merely replacing a part, fitting, or structure that is performing a similar function, the nature of the proposed work indicates that a modification is contemplated. Although the old propellers would be replaced with new propellers with the same general purpose, the proposed new propellers would be of a new and improved design to support or be compatible with lower operations speed.
On the subject of whether an item provides an improvement or enhancement in operation or efficiency of the vessel, the proposed work would be carried out for the purpose of improving fuel and operational efficiency and would reduce the vessels’ environmental impact. It would improve the operation of the vessels by providing improved fuel consumption. The new design of the propellers would also reduce the vessels’ environmental impact.
Based upon the information provided by Maersk and after consideration each of the four factors, we are of the opinion that that the proposed work would meet the above-discussed criteria for vessel modifications.
c. Installation of Becker Twisted Fins Energy Saving Devices: considering the first factor, whether there is a permanent incorporation into the hull or superstructure, the nature of the work to be done to the vessels’ hulls and fittings is such that it would constitute a permanent incorporation into the vessels. The BTF installation would require the attachment of the devices to the vessels’ hulls below the waterline by permanent means, principally welding.
Regarding the second factor, whether, in all likelihood, an item would remain aboard a vessel during an extended lay-up, the nature of the work to be done to the hulls and fittings is such that it indicates that the contemplated items would remain aboard a vessel during an extended lay-up. The new BTFs proposed for installation would be permanently incorporated into the vessels’ structures, and would not be portable or capable of being removed from the vessels without significant effort and possible structural damage.
The third factor of our analysis, whether an item constitutes a new design feature and is not merely replacing a part, fitting, or structure that is performing a similar function, the nature of the proposed work indicates that a modification is contemplated. The new BTFs proposed for installation represent an entirely new design element, a feature absent in the current vessel design.
On the subject of whether an item provides an improvement or enhancement in operation or efficiency of the vessel, the proposed work would be carried out for the purpose of improving fuel efficiency and reducing emissions. It would improve the operation of the vessels by lowering fuel costs and reducing emissions.
Based upon the information provided by Maersk and after consideration each of the four factors, we are of the opinion that that the proposed work would meet the above-discussed criteria for vessel modifications.
d. Engine Power Limitation Software Installation: considering the first factor, whether there is a permanent incorporation into the hull or superstructure, the nature of the work to be done to the vessels’ hulls and fittings is such that it would not constitute a permanent incorporation into the vessels. The software installation would become a part of the vessels’ engine control equipment, resident in the computers, but would be easily replaced with newer or different versions. Accordingly, the software would not be permanently incorporated into the vessels.
Regarding the second factor, whether, in all likelihood, an item would remain aboard a vessel during an extended lay-up, the nature of the work to be done to the hulls and fittings is such that it indicates that the contemplated items would remain aboard a vessel during an extended lay-up. The new software proposed for installation would be incorporated into the vessels’ engine control systems. As the engine control systems are essential to the operation of the main engines, the new software would remain with the engines, and, hence, the vessels, during an extended layup
The third factor of our analysis, whether an item constitutes a new design feature and is not merely replacing a part, fitting, or structure that is performing a similar function, the nature of the proposed work indicates that a modification is contemplated. The new software proposed for installation would replace the current engine control software, it represents an update to significantly modify the operation of the engine, and represents a new design element, a feature absent in the current vessel design.
On the subject of whether an item provides an improvement or enhancement in operation or efficiency of the vessel, the installation of new software would be carried out for the purpose of improving fuel efficiency and reducing emissions. It would improve the operation of the vessels by lowering fuel costs and reducing emissions.
Based upon the information provided by Maersk and after consideration each of the four factors, we are of the opinion that that the proposed work would meet the above-discussed criteria for vessel modifications.
DUTY-FREE TREATMENT UNDER FREE TRADE AGREEMENTS
You further inquire as to whether parts, material, equipment, and labor would be eligible for non-dutiable treatment under the terms of various Free Trade Agreements. Title 19 Code of Federal Regulations § 4.14(a)(3) provides, in pertinent part:
Expenditures subject to declaration and entry but not duty. Under separate provisions of law, the cost of labor performed, and of parts and materials produced and purchased in Israel are not subject to duty under the vessel repair statute. Additionally, expenditures made in Canada or in Mexico are not subject to any vessel repair duties. Furthermore, certain free trade agreements between the United States and other countries also may reduce the duties on vessel repair expenditures made in foreign countries that are parties to those agreements, although the final duty amount may depend on each agreement’s schedule for phasing in those reductions. In these situations and others where there is no liability for duty, it is still required, except as otherwise required by law, that all repairs and purchases be declared and entered.
Accordingly, the cost of labor performed, and of parts and materials produced and purchased in Israel, and expenditures made in Canada or in Mexico are not subject to vessel repair duties. With regard to other nations, Subheading 9818.00.07 of the Harmonized Tariff Schedule of the United States (HTSUS) provides that 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 to engage in the foreign or coasting trade, or vessels intended to be employed in such trade, may be entered free of duty upon first arrival in any port of the United States when imported from the following nations:
Australia
Bahrain
Canada
Chile
Colombia
Israel
Jordan
Korea
Morocco
Mexico
Oman
Dominican Republic
Panama
Peru
Singapore
Accordingly, work performed on the subject vessels in these nations may be eligible for duty-free treatment, if the conditions set forth in those agreements are met.
HOLDING
The proposed foreign shipyard work described above would appear to constitute a modification to the hull and fittings of the eight vessels of the MAERSK KOWLOON-class, respectively the M/Vs MAERSK ATLANTA, MAERSK CHICAGO, MAERSK COLUMBUS, MAERSK DENVER, MAERSK DETROIT, MAERSK HARTFORD, MAERSK KENSINGTON, MAERSK KINLOSS, MAERSK MEMPHIS, and MAERSK PITTSBURGH.
We emphasize that this ruling is merely advisory in nature and does not eliminate the requirement to declare work performed abroad at the vessel’s first United States port of arrival, nor does it eliminate the requirement to file a vessel repair entry showing this work. See 19 C.F.R. §§ 4.14(d) and (e). Furthermore, any final determination on this matter is contingent on CBP’s review of the evidence submitted pursuant to 19 C.F.R. § 4.14(i).
Sincerely,
Lisa L. Burley
Chief
Cargo Security, Carriers and Restricted Merchandise Branch
Office of International Trade, Regulations and Rulings
U.S. Customs and Border Protection