VES-13-18-CO:R:IT:C 112143 BEW
Chief, Technical Branch
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, California 90731
RE: Protest No. 3126-92-100005; Anchorage Vessel Repair Entry
No. C31-0008394-9 dated September 28, 1990; M/V ARCTIC HERO V-1;
Conversion; Modification; consumable supplies; sea stores; ship's
stores; non-segregated cleaning operations; U.S. spare parts;
19 U.S.C 1466(h); 19 U.S.C 1446
Dear Sir:
This is in response to your memorandum dated March 10,
1992, from your office which transmitted protest No. 1801-90-
000062, relating to vessel repair entry No. C31-0008394,
concerning the ARCTIC HERO, Voyage 1, which arrived at the port
of Anchorage, Alaska, September 22, 1990.
FACTS:
The M/V ARCTIC HERO is a U.S.-flag vessel owned and operated
by Palmco Pacific Corporation of Seattle, Washington. The
protestant states that the subject vessel was converted from an
oil rig supply vessel to a stern trawler head and gut fish
factory processing vessel at the Murakami Shipyard in Ishinomaki,
Japan, during the period of July 21, 1989 - July 9, 1990.
Subsequent to the completion of this conversion work the vessel
arrived in the United States at Dutch Harbor, Alaska, on
September 22, 1990. A vessel repair entry was filed on
September 28, 1990.
Pursuant to an authorized extension of time, an application
for relief, dated December 18, 1990, was filed. The basis for
the relief requested was that the conversion work in question
constituted a nondutiable modification to the vessel. The
conversion work purportedly entailed the following: (1)
lengthening the vessel to create increased freezer storage space,
a larger area for a processing deck and a longer net deck to
repair and work the nets; (2) increasing the power,
maneuverability and control standards of the propulsion system;
(3) increasing the electrical and hydraulic power of the
auxiliary engine systems to run processing, refrigeration and
hydraulic machinery; (4) installation of a hydraulic system
including hydraulic pumps, motors, and winches to operate the
trawl net and to unload cargo; (5) installation of a processing
plant to produce a marketable product; (6) installation of a
refrigeration plant to freeze and preserve fish; and (7)
increasing the number and size of all accommodation areas to
house a substantially larger crew, including processing crewmen.
The application for relief was denied on August 6, 1991 (HQ111641
GEV), on the basis that:
... the Aizawa invoice descriptions do not enable
us to determine conclusively that the work
performed to the vessel is not dutiable as a
modification. The invoices contain only the most
general summary of the work carried out by the
shipyard. Without details provided by the
architectural plans and shipyard invoice
descriptions of the work performed, we can only
speculate on the actual work carried out. In the
absence of such information, we find the costs
contained in the Aizawa invoices to be dutiable
with the exception of the charges for dockage on
p. 1 (see C.I.E. 429/61) and domestic packing and
freight on p. 19-A (see C.D. 1830).
The entry was liquidated on October 25, 1991. The protest
was timely filed on January 22, 1992. The protestant claims that
certain items contained in the Aizawa Shipping Company invoices
are non-dutiable modifications. In support of the claim for
relief various documentation including invoices, lease
agreements, statements of corporate officers of Palmco Pacific
Corporation, and prior Customs rulings were submitted. In
addition, the protestant has submitted drawings (A-N) indicating
the structural changes made to the vessel.
The record shows that the Aizawa Shipping Company managed
the conversions, which actually took place at Murakami Shipyards,
Ishinomaki, Japan. The protestant has submitted the following
new evidence: (1) drawings explaining the (a) "non-dutiable
installation of the fish processing factory", (b) the "newly
converted hull superimposed over the previously existing hull",
(c) the removal and scrapping of the existing machinery
components and replacement with new components required for the
newly extended service, and (d) the modification of the existing
hull which was required in order to accommodate the larger and
more complex machinery components, trawl gear, fish factory
equipment, freezer storage space and larger accommodations.
The services of expert marine surveyors, Nelson & Associates,
Inc., were retained to review the work performed. An excerpt
from their report provides:
Only those items which involve permanent change or
installation and were required to be changed or
modified in order for the vessel to perform the new
mission of stern trawler/fish factory have been
included. No item of purchase or labor performed has
been included if they relate to the repair of
previously existing equipment or the replacement of
equipment with the same or similar components. All new
equipment added was required as a result of the
vessel's new service and where the size or type of the
existing equipment would not suffice....It is the
opinion of the Undersigned (i.e., Percy C. Overman,
Nelson & Associates, Inc.) that the expenses noted
above in the Recap paragraph could be reasonably
attributed to the structural and mechanical
modifications necessary to the conversion of this
vessel from an oil field supply vessel to a stern
trawler/factory vessel.
Further, the protest seeks relief for certain supplies and
materials alleged to be U.S. spare parts. We are asked to review
the dutiability of the following:
1. Aizawa Shipping Invoices
2. Marco Marine Invoice Nos. 337816, 337960, 338044, 338113,
338260, 338593, 338706, 338746, 338849, 338850, 338851,
338857, and 339041.
3. Hatch and Kirk Export Co., Inc. Invoice No. 10665209991-01
4. Steve Ewing's Diesel Service, Inc. Invoice No. 6094
5. The Falk Corporation Invoice Nos. 8973815 and 9074132
6. Stellar Industrial Supply Invoice No. 1030411-02
7. DEFCO Invoice No. 40422
ISSUE:
Whether the evidence presented is sufficient to prove that
the foreign work performed on the subject vessel for which the
protestant seeks relief constitutes modifications/alterations/
additions so as to render the work nondutiable under 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.
In its application of the vessel repair statute, Customs has
held that modifications to the hull and fittings of a vessel are
not subject to vessel repair duties. Over the course of years,
the identification of modification processes has evolved from
judicial and administrative precedent. In considering whether an
operation has resulted in a modification which is not subject to
duty, the following elements may be considered.
1. Whether there is a permanent incorporation into the hull
or superstructure of a vessel (see United States v. Admiral
Oriental Line et al., T.D. 44359 (1930)), either in a
structural sense or as demonstrated by the means of
attachment so as to be indicative of the intent to be
permanently incorporated. This element should not be given
undue weight in view of the fact that vessel components must
be welded or otherwise "permanently attached" to the ship as
a result of constant pitching and rolling. In addition,
some items, the cost of which is clearly dutiable, interact
with other vessel components resulting in the need, possibly
for that purpose alone, for a fixed and stable juxtaposition
of vessel parts. It follows that a "permanent attachment"
takes place that does not necessarily involve a
modification to the hull and fittings.
2. Whether in all likelihood, an item under consideration
would remain aboard a vessel during an extended lay up.
3. 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.
4. Whether an item under consideration provides an
improvement or enhancement in operation or efficiency of the
vessel.
Very often when considering whether an addition to the hull
and fittings took place for the purpose of 19 U.S.C. 1466, we
have considered the question from the standpoint of whether the
work involved the purchase of "equipment" for the vessel. It is
not possible to compile a complete list of items that might be
aboard a ship that constitute its "equipment". An unavoidable
problem in that regard stems from the fact that vessels differ as
to their services. What is required equipment on a large
passenger vessel might not be required on a fish processing
vessel or offshore rig.
"Dutiable equipment" has been defined to include:
...portable articles necessary or appropriate
for the navigation, operation, or maintenance
of a vessel, but not permanently incorporated
in or permanently attached to its hull or
propelling machinery, and not constituting
consumable supplies. Admiral Oriental,
supra., (quoting T.D. 34150, (1914))
By defining what articles are considered to be equipment,
the Court attempted to formulate criteria to distinguish non-
dutiable items which are part of the hull and fittings of a
vessel from dutiable equipment, as defined above. These items
might be considered to include:
...those appliances which are permanently
attached to the vessel, and which would
remain on board were the vessel to be laid
up for a long period... Admiral Oriental,
supra., (quoting 27 Op. Atty. Gen. 228).
A more contemporary working definition might be that which
is used under certain circumstances by the Coast Guard; it
includes a system, accessory, component or appurtenance of a
vessel. This would include navigational, radio, safety and,
ordinarily, propulsion machinery.
The Customs Service has held that the decision in each case
as to whether an installation constitutes a nondutiable
modification/alteration/addition to the hull and fittings of a
vessel depends to a great extent on the detail and accuracy of
the drawings and invoice descriptions of the actual work
performed. Even if an article is considered to be part of hull
and fittings of a vessel, the repair of that article, of the
replacement of a worn part of the hull and fittings, is subject
to vessel repair duties.
Customs has held that the installation of fish processing
machinery is a non-dutiable modification to the hull and fittings
of a vessel (see C.S.D. 83-35). It has held that whether the
work entailed in converting a vessel from one operation to
another is a nondutiable modification to the hull and fittings of
the vessel will be determined according to the standards outlined
above.
1. AIZAWA SHIPPING CO. LTD. INVOICE
With regard to the items of cost listed on the Aizawa
invoice, the new evidence submitted demonstrates sufficiently
that the conversion work performed on the vessel and the other
work necessitated by the conversions are nondutiable
modifications/alterations/additions to the hull and fittings of
the vessel. Our findings are as follows:
Page No. 1 - All costs are non-dutiable except the cost
associated with cleaning. Cleaning operations which remove
rust and deterioration or worn parts, and which are a
necessary factor in the effective restoration of a vessel to
its former state of preservation, constitute vessel repairs
(See C.I.E. 429/61). Insofar as inspection and cleaning
operations are concerned, Customs has long held the cost of
cleaning is not dutiable unless it is performed as part of,
in preparation for, or in conjunction with dutiable repairs
or is an integral part of the overall maintenance of the
vessel; see C.I.E.'s 18/48, 125/48, 910/59, 820/60, 51/61,
429/61; 569/62, 698/62; C.D. 2514; T.D.'s 45001 and 49531.
Pursuant to C.I.E. 1325/58 and C.I.E. 565/55, duties may not
be remitted where the invoice does not segregate the
dutiable costs from the non-dutiable costs. In the subject
invoice, the cost for cleaning operations associated with
the dutiable repairs is not segregated from cost of the
cleaning operations associated with the nondutiable repairs.
Accordingly, the protest is denied as to this item of cost.
Page Nos. 1A through 1N - All items of cost are associated
with nondutiable modifications.
Page Nos. 2 through 6 and 8 through 20 - All items of cost
are associated with nondutiable modifications.
Page No. 7 - Item Nos. 1 Studlink chain and 2. Stocklass
anchors - In as much as these items are equipment the cost
associated with them is dutiable.
Pursuant to C.I.E. 196/60, consumable supplies which are
used to effect repairs are dutiable. Consumable supplies and/or
sea stores are distinguished from ship's stores in T.D. 22343 as
follows:
.. 'ship's stores' embrace those articles which form
'part of the body, tackle, apparel, or furniture of a
ship', being necessary for the ship itself... while
"sea stores" include only such as are "intended for the
health and sustenance of the crew or passengers," "all
stores put on board for the purpose of consumption by
the persons in the ship,"... T.D. 22433, August 9.
1900, quoting from United States v. Twenty-Four Coils
of Cordage, 28 Fed. Cas. 276 (E.D. Pennsylvania,
1832).
With regard to the Aizawa invoice, page Nos. 21 through 27
we found as follows:
Page No. 21 - We held in Headquarters ruling 112179, dated
May 6, 1992, relating to the sistership NORTHERN HERO (entry
No. C31-0008307-1), based on the belief that the pumps
described on page 38A were installed as nondutiable
modifications, that the cost was not subject to duty. We
note on review of this case that the same pumps were taken
aboard as spares. It follows that these pumps were not made
a part of the hull and fittings of the vessel, therefore,
the costs of these pumps are subject to duty in both
entries.
Page Nos. 21A through 22 - All items of cost are dutiable as
equipment.
Page No. 23 - The costs associated with the Coffee Machine
and the Juice Dispenser Machine are dutiable as equipment.
In as much as the coffee beans and the juice fluid are
consumable supplies, the costs associated with these two
items are nondutiable.
Page No. 24 through 24J - All items of cost are dutiable as
equipment.
Page No. 25 - All items of cost are nondutiable consumable
supplies.
Page No. 26 - All items of cost are dutiable as equipment.
Page No. 27 - All items of cost are nondutiable consumable
supplies.
Page No. 28 - Hull paint (old) - all items of cost are
dutiable. Painting existing portions of the hull and
machinery is in the nature of maintenance; therefore, the
paint used is dutiable as well.
Page No. 29 - hull paint (new) - all items of cost are
nondutiable as a part of the modification repairs.
Pursuant to CIE 289/49, equipment leased in a foreign
country for use on a vessel of the United States is not subject
to the duty provisions of section 1466. Customs has ruled that
equipment leased is not dutiable because section 1466 is
expressly limited by its terms to equipment which is "purchased"
during the foreign voyage. CIE 289/49 also held that the
installation costs incurred in connection with the leasing of
the aforementioned equipment are not dutiable.
With regard to Page Nos. 30 through 32 - Fitting and piping
work associated with the equipment listed in the lease
agreement is nondutiable for the reasons stated above.
With regard to the trawl nets, etc. listed in the lease
agreement, these costs are nondutiable for the reasons
stated above.
With regard to certain other invoices, you claim that
certain items are free of duty either as products of U.S.
origin, or that duty was previously paid and they would not be
dutiable pursuant to section 1466(h)(2).
Title 19, United States Code, section 1466(h) (19 U.S.C.
1466(h)), exempts from duty spare repair parts or materials that
have been manufactured in the United States or entered the United
States duty-paid and are used aboard a cargo vessel engaged in
foreign or coasting trade. As discussed in Customs Ruling
111464, the Customs Service interprets the use of the term cargo
to limit the exception contained in the statute to vessels whose
sole service is the transportation of cargo and which are
actually engaged in that service while documented for the foreign
or coasting trade. The ARCTIC HERO, at the time of arrival, was
or was intended to be used as a fish factory processor and
consequently does not qualify for the exceptions contained in 19
U.S.C. 1466(h).
Failing qualification for the exceptions accorded to cargo
vessels, we must evaluate your claims regarding duty treatment of
parts under the previously established statutory rules. Customs
administration of duty assessment issues under section 1466
regarding United States manufactured materials purchased in the
United States has been guided by the terms of Treasury Decision
75-257. T.D. 75-257, 9 Cust. B. & Dec. 576 (1975). That
decision provides that when materials of United States
manufacture are purchased by the vessel owner in the United
States for installation abroad by foreign labor, the labor cost
alone is subject to duty under 19 U.S.C. 1466. The owner or
master must submit written documentation or other physical
evidence, such as an affidavit by the equipment manufacturer,
that the equipment was manufactured and purchased in the United
States. See Headquarters Ruling Letter 110953, dated
September 19, 1990. Absent such documentation, the material is
deemed foreign and consequently is dutiable.
2. Marco Marine Co. Invoices
You seek relief for certain supplies and materials
mentioned in the Marco Marine invoices because they are either:
(1) consumable supplies; and/or (2) items of U.S. origin; and/or
(3) foreign origin items with U.S. duty paid. The exception
provided by 19 U.S.C. 1466(h), only applies to cargo vessels.
Therefore, the fact that duty was paid on a foreign origin item
is irrelevant. To escape the payment of duty, the item must be
of (1) U.S. origin (shown by written documentation by the
equipment manufacturer that the equipment was manufactured in the
United States), and (2) purchased in the United States (shown by
a United States bill of sale). In the application for relief,
Marco Marine attested that certain items were of U.S. origin. We
agree that these items are not dutiable.
As to the life rafts in Marco Marine Co. invoice No. 338260,
Marco Marine attested that they are of Danish origin. Since life
rafts are considered to be equipment, they are dutiable under 19
U.S.C. 1466(a), unless an exception applies. The only exception
is 19 U.S.C. 1466(h), which applies to cargo vessels, or U.S.
origin/U.S. purchased items. Because Marco has attested that the
items listed in invoice Nos. 337816, 337960, 338044, 338113,
338593, 338706, 338746, 338849, 338850, 338851, 338857, and
339041 are U.S. origin items, we find these items to be
nondutiable. All items on the Marco Marine invoices are
nondutiable with the exception of the life rafts.
3. All remaining invoices
With regard to the following invoices, the record shows that
each company has attested that the items listed on their
respective invoices are of U.S. origin. Accordingly, the cost
associated with these items are nondutiable.
Hatch and Kirk Export Co., Inc. Invoice No. 10665209991-01,
Steve Ewing's Diesel Service, Inc. Invoice No. 6094,
The Falk Corporation Invoice Nos. 8973815 and 9074132,
Stellar Industrial Supply Invoice No. 1030411-02,
DEFCO Invoice No. 40422.
HOLDING:
The evidence presented is sufficient to prove that the
foreign work performed on the subject vessel for which the
protestant seeks relief constitutes modifications/alterations/
additions so as to render the work nondutiable under 19 U.S.C.
1466. Accordingly, the charges listed on the Aizawa Shipping
Co., Ltd. invoices under consideration are nondutiable with the
exception of those items discussed above.
The vessel does not qualify as a cargo vessel under 19
U.S.C. 1466(h). Consequently those parts not attested as U.S.
origin are dutiable.
The protest is granted in part and denied in part as set
forth above.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch
cc: Tom Willis, USCG