VES-13-18-CO:R:P:C 110674 KVS
Chief, Technical Branch
Pacific Region
1 World Trade Center
Suite 705
Long Beach, CA 90831
Re: Protest No. 27049 002308, PRESIDENT KENNEDY V-6
Dear Sir:
Your memorandum dated November 21, 1989, forwarded a protest
regarding vessel repair entry no. C27-0012563-9. Our findings
are set forth below.
FACTS:
The PRESIDENT KENNEDY is one of three C-10 or "non-Panamax"
vessels (so named because their configurations include a beam too
wide to transit the Panama Canal) built for American President
Lines, Ltd. (APL) by Howaldstwerke-Deutsche Werft AG (HDW) in
Kiel, West Germany. The subject vessel was delivered to APL on
July 15, 1988, and had work performed shortly thereafter in
foreign shipyards. Specifically, the power supply and key pad
were replaced, the position fixing equipment was repaired, and
the transceiver power amplifier was relaced. Subsequent to the
completion of the aforementioned work, the subject vessel arrived
in the United States at San Pedro, California, on February 13,
1989.
A vessel repair entry covering the voyage in question was
filed February 17, 1989. In your letter dated June 23, 1989, you
incorporate by reference a letter dated December 13, 1988, from
Mr. Robert E. Weeks, Marine Customs Coordinator, APL, to the
Chief, Liquidation Branch, U.S. Customs Service, San Francisco,
which advances the argument that certain foreign work performed
on the PRESIDENT KENNEDY was pursuant to a new vessel
construction warranty which extended one year from the date of
delivery and therefore was not subject to duty. In support of
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this claim a copy of the construction contract (including the
warranty provision) was submitted. However, no application for
relief was filed to cover the particular entry in question. In
view of the failure to submit an application, the entry was
forwarded for liquidation, which took place on June 2, 1989.
A protest (with copies of invoices and job control forms)
was timely filed on June 28, 1989, covering entry no. C27-
0012563-9 claiming that the following items were covered by the
warranty clause of the construction contract: Item 1 (JCF no.
JFK 6-122, power supply and key pad, Raytheon); Item 2 (JCF no.
JFK 6-129, position fixing equipment, Trimble Navigation, Japan);
Item 4 (JCF no. JFK 6-142, transceiver power amplifier, Marconi
International Marine Co., Ltd.).
In letters to Mr. Weeks, dated July 17, 1989 and August 9,
1989, we stated that APL failed to submit the requisite evidence
necessary to substantiate the warranty claims of this and other
pending APL protests regarding the C-10 vessels. We therefore
allotted APL a period of time until November 7, 1989, to submit
evidence that the contractors either paid the invoices in
question or refunded APL the costs involved pursuant to the terms
of the warranty. Furthermore, we emphasized that the requested
evidence must indicate not only that a particular item in
question was covered by the warranty but that the entire cost was
reimbursed.
By letters dated November 2, 1989 and November 6, 1989, APL
provided the following additional documentation in support of
duty-free treatment for certain identified warranty items:
affidavits from the Head Manager, Guarantee, HDW, that the work
in question was performed pursuant to the contract warranty
provisions and was necessary to satisfy the original
specifications of the contract for the construction of the
vessel; letters of agreement signed by officials of both APL and
HDW setting forth warranty items that have been agreed and paid
with respect to the subject vessels and items that have been
agreed in principle; copies of wire transfer receipts by APL of
sums of money from HDW evidencing proof of payment of warranty
claims; and a certification of an APL officer stating that the
protested items for which a refund is requested were included in
the agreements reached with HDW and that payment was received for
these items by APL.
In the letter dated November 2, 1989, APL indicated that
agreement with HDW had been made in principle as to certain other
items, but no reimbursement had, as yet, been received. APL
requested and received an extension until December 7, 1989, to
submit additional documentation as to these items. We have
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received no such documentation.
ISSUE:
Whether the foreign work performed on the subject vessel for
which the protestant seeks relief is part of the original
construction pursuant to a warranty clause, or dutiable repairs
within the meaning of 19 U.S.C. 1466.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466, provides, in
pertinent part, for payment of duty in the amount of 50 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 engage in such trade.
The Supreme Court has determined that although a vessel is a
vehicle of dutiable articles, the vessel itself is not a dutiable
article and thus the cost of foreign construction of a vessel is
not dutiable. The Conqueror, 166 U.S. 110, 17 S. Ct. 510, 41
L.Ed. 37 (1987). Furthermore, the vessel's original equipment
is not dutiable since it is part of the construction cost of the
vessel. (See 22 Op. Atty. Gen. 360 (1899)).
In Sea-Land Service, Inc. v. United States, 638 F.Supp. 1404
(CIT; March 31, 1988), the court set forth criteria to be used in
determining whether a specific item is part of the original
construction of the vessel or is a dutiable repair under 19
U.S.C. 1466. Some of the salient factors to be considered
include the terms of the original contract, when the work was
actually performed, and the nature and purpose of the work and
the equipment provided. It is important to determine whether the
"guarantee clause" is indeed a warranty of fitness for use and
quality, and is limited in time to what may properly be deemed
part of the original construction. Id. at 1407.
Finally, the court stated that the duration of the warranty
clause must be reasonable, and only long enough to permit the
owner of the vessel to determine whether there has been
compliance with the construction specifications, and to ascertain
whether the work performed pursuant to the warranty clause is
related to compliance with the specifications set forth in the
original contract for the construction of the vessel. Hence, all
work performed and equipment added which is not encompassed by
the contract is dutiable under the foreign repair statute. Id.
at 1407.
In the instant case, the work in question was performed
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shortly after delivery of the vessel (i.e., within the one year
duration of the warranty) and the yard which constructed the
vessel acknowledged coverage of the work under the warranty for
all three items. The yard has refunded APL the full amount of
the expenses covering Item 1 (JCF no. 6-122, power supply and key
pad) and Item 2 (JCF no. 6-129, position fixing equipment).
However, although the evidence indicates that there has been an
agreement in principle as to Item 4 (JCF no. 6-142), no documents
have been submitted evidencing proof of reimbursement by HDW for
this item.
Therefore, the protestant has submitted evidence sufficient
to substantiate only the claim that Item 1 (power supply and key
board) and Item 2 (position fixing equipment) are non-dutiable
equipment pursuant to the warranty provisions of the original
contract for construction. Item 4 (transceiver power amplifier)
remains dutiable.
HOLDING:
The foreign work performed on the subject vessel for which
the protestant has submitted evidence indicating both coverage
under the warranty provisions of the original construction
contract and subsequent reimbursement of the expense by the
builder is non-dutiable.
Accordingly, the protest is granted in part and denied in
part.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch