VES-13-18-CO:R:P:C 110884 KVS
Category: Carriers
Chief, Technical Branch
Pacific Region
1 World Trade Center
Suite 705
Long Beach, CA 90831
Re: Protest No. 270489-003984, PRESIDENT KENNEDY V-9
Dear Sir:
Your memorandum dated February 26, 1990, forwarded a protest
regarding vessel repair entry no. C27-0075224-2. Our findings
are set forth below.
FACTS:
The PRESIDENT KENNEDY is one of three C-10 or "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 main engine access gratings
and ladders were fabricated, repair kits were provided for four
indicator cocks that leaked or refused to open, and a new stores
box guide rail was installed to prevent damage to the ship's
fittings. Subsequent to the completion of the aforementioned
work, the subject vessel arrived in the United States at San
Pedro, California, on May 27, 1989.
A vessel repair entry covering the voyage in question was
filed on May 27, 1989. APL's letter of December 7, 1989,
incorporates 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 arguments that certain foreign work performed
on the PRESIDENT KENNEDY was pursuant to a new vessel
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construction warranty which extended one year from the date of
delivery and therefore was not subject to duty. In support of
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 September 15,
1989.
A protest (with copies of the invoices and job control
forms) was timely filed on December 11, 1989, covering entry no.
C27-0075224-2. APL's letter of December 7, 1989, which was
attached to the protest, claims that the following items were
covered by the warranty clause of the construction contract:
Item 1 (JCF no. 8-108, crankcase grating, Omi Engineering Co.),
Item 2 (JCF no. 9-156, repair kits, Sulzer Brothers of Japan),
and Item 4 (JCF no. 8-111 Hongkong United Dockyards, Ltd.). Also
attached to the protest is the letter dated December 13, 1988,
which was submitted in connection with other APL protests also
based upon warranty.
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 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 of 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.
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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 (1897). 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 Services, Inc. v. United States, 638 F. Suppl
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 ourpose 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
shortly after the delivery of the vessel i.e., within the one
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year duration of the warranty), the yard which constructed the
vessel acknowledged coverage of the work under the warranty, and
said yard refunded APL the full amount of the expenses covering
the work.
Accordingly, the protestant has submitted evidence
sufficient to substantiate the claim that the work in question
(i.e., Item 1, crankcase grating; Item 2, repair kits; and Item
4, stores box guide rail) is non-dutiable pursuant to the
warranty provisions of the original contract for construction.
HOLDING:
The foreign work performed on the subject vessel for which
the protestant seeks relief is part of the original construction
pursuant to the warranty clause and therefore is non-dutiable.
Accordingly, the protest is granted.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch