VES 13-18 CO:R:IT:C 112179 MLR
Peter S. Herrick
3520 Crystal View Court
Miami, Florida 33133
RE: Vessel Repair Entry No. C31-0008307-1; Protest No. 3126-92-
100004; Modification; Spare Parts; M/V NORTHERN HERO.
Dear Sir:
This letter is in response to your protest filed on behalf
of Palmco Pacific Corp.
Before we discuss our findings, we first reply to your
request that Customs not issue a ruling on the merits but, in
lieu thereof, issue a letter to you that identifies why Customs
is unable to issue a ruling favorable to your client so that you
may submit additional argument. You cite 19 CFR 174.28, as
authority for this request; this section does not anticipate an
exchange of unofficial rulings and counterclaims such as you
propose. A clear result of such a procedure would be indecision
on the merits of a case. Further, you have not submitted any
additional written position, a condition precedent of section
174.28. It also appears that your client, or you on your
client's behalf, waived an opportunity to present additional
arguments at the petition for review level.
In addition to the above, we invite...since it apparently
does not go to the substance of the case...any explanation why
the Aizawa invoice no. 1, dated February 28, 1990, was changed
after the application for relief was denied to show additional
charges of 192,000 yen. We also note and did not discover a
purpose for submitting in the protest under Exhibit A, Aizawa
invoice no. 21b, retyped and renumbered as invoice 17 and lacking
item no. 4 (spare parts & tools), yet submitting it unchanged
from the application for relief in Exhibit B of the protest.
FACTS:
The record reflects that the subject vessel, the M/V
NORTHERN HERO, arrived at the port of Dutch Harbor, Alaska, on
June 9, 1990. Vessel repair entry, number C31-0008307-1, was
filed on June 15, 1990. The record reflects that the vessel was
converted from an oil rig supply vessel to a stern trawler head
and gut fish factory processing vessel. The Aizawa Shipping
Company managed the conversions, which actually took place at
Murakami Shipyards, Ishinomaki, Japan. The work included
removing the superstructure, lengthening the vessel,
constructing a new superstructure, replacing the engine to
accommodate a different propulsion system, installing a
hydraulic system to operate trawl nets, and installing freezing
and processing areas.
The entry was liquidated on October 25, 1991. The protest
was timely filed on January 22, 1992. You claim that certain
items contained in the Aizawa Shipping Company invoices are non-
dutiable modifications. The modification claim was denied in the
application for relief (see Customs Ruling 111464) because the
evidence presented was not sufficient to conclusively establish
that the work performed to the vessel was a modification.
Consequently, you have submitted drawings a-n indicating the
structural changes made to the vessel. 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 relief sought for certain supplies and
materials was denied in the application for relief because the
invoices presented did not indicate the country of origin. We
are asked to review the dutiability of the following:
I. Aizawa Shipping Invoices
II. Marco Marine Invoices 338155, 338218, 338223, 338345, 339485
and Marco Order 13998.
III. Arya Marine Supply Invoices 15936, 15937, 15947, 15948,
15960, 15961, 15963, 15964, 15968, 15980, and 15990.
IV. Maritime Services Invoice, Item No. 8.
V. Key Marine Industries Invoice
VI. Esso Imperial Oil Invoice
ISSUES:
(1) Whether the work performed to the vessel while in a
foreign shipyard constituted a modification to the vessel and is
therefore not subject to duty under 19 U.S.C. 1466.
(2) Whether the costs for parts are dutiable under 19
U.S.C. 1466.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466, provides in
pertinent part, for payment of an ad valorem duty of 50 percent
on the cost of foreign parts purchased and foreign repairs to
vessels documented under the laws of the United States to engage
in the foreign or coastwise trade.
I. Aizawa Shipping Invoices
In its application of the vessel repair statute, the
Customs Service has held that modifications, alterations, or
additions to the hull and fittings of a vessel are not subject to
vessel repair duties. Over the course of years, the
identification of work constituting modifications on the one hand
and repairs on the other has evolved from judicial and
administrative precedent. In considering whether an operation
has resulted in a modification that 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, 18 C.C.P.A. 137 (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.
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 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 under consideration provides an
improvement or enhancement in operation or efficiency
of the vessel.
For purposes of section 1466, 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.
T.D. 34150, 26 Treas. Dec. 183, 184 (1914)(quoted with approval
in Admiral Oriental).
The Customs Service has held that the decision in each case
as to whether an installation constitutes a non-dutiable addition
to the hull and fittings of the 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 the hull and fittings of a vessel, the
repair of that article, or the replacement of a worn part of the
hull and fittings, is subject to vessel repair duties.
After reviewing the entry documentation before us, along
with the newly submitted evidence, we conclude that the costs
listed on the Aizawa invoices are for non-dutiable modification
work, with the following exceptions (the invoice numbers
correspond to the Customs recap sheets):
Aizawa Invoices
#4 Hull outfitting work (old) - Work performed on an old
section of the hull falls into the category of maintenance
or repairs.
#6 Hull painting work (old) - Painting an existing portion of
the vessel is in the nature of maintenance and is a dutiable
repair.
#15 Machinery outfitting work (old) - (see #4 above.)
#18 Machinery painting work (old) - (see #6 above.)
#21b Item no. 4 - Spare Parts & Tools. You claim that this item
is not dutiable under 19 U.S.C. 1466, because supplies
consumed aboard the vessel are not dutiable. The invoice
does not give any detail what these "spare parts and tools"
consist of; therefore, this item is dutiable.
#22 Stock Less Anchor, Stud Link Chain. T.D. 40934. (equipment)
#32b Part D, item 5 - Spare Parts and tools. Again, the invoice
lacks sufficient detail to consider this non-dutiable.
#36 Lamps (equipment)
#37 Pole Balance; Daixan (equipment)
#38a All items are dutiable as equipment, except: ch looker
pump, ref cool sw pump, both factory bilge pumps, switch,
both plug receptacles, and electric wire.
#40 All items are dutiable as equipment. The Nelson report
indicates that items 3 and 4 ("coffee bean" and "fluid of
juice") are, in fact, a coffee grinder and a juicer.
#41 All items are dutiable. (equipment)
#41a through 41j - All items are dutiable. (equipment)
#43b Items 23, 24, 26-33 are dutiable. (equipment)
#44 All items are dutiable. (equipment)
#46b Items 14 and 19 are dutiable. No additional evidence was
presented in the protest to show what these items actually
are.
#47 All items are dutiable. Painting existing portions of the
hull and machinery is in the nature of maintenance (see #6
and 18 above); therefore, the paint used is dutiable as
well.
In numerous items, you alternatively claim that they 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). We agree with the decision made in the
application for relief, that 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 NORTHERN HERO, at the time of arrival, was a fish factory
processor and consequently does not qualify for the exceptions
contained in 19 U.S.C. 1466.
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.
II. Marco Marine Co. Invoices
You seek relief for certain supplies and materials,
contained 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. We shall reiterate
what was discussed in the application for relief: 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 invoice order 13998, 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 did not attest that
the items, listed in invoice 338155, 338218, 338223, 338345 and
339485 are U.S. origin items, and no further evidence has been
presented in the protest, which you should know was necessary
from a reading of Customs Ruling 111464, these items are
dutiable as well. Further, we do not consider these items to be
consumable supplies. As to your request to submit additional
evidence, please see our discussion of 19 CFR 174.28, on page 1.
III. Arya Marine Supply Invoices
You claim that for those items which Customs considers
dutiable, that they are either (1) consumable supplies, and/or
(2) U.S. origin items, and/or (3) foreign origin U.S. duty paid
items. We disagree with your claim for the same reasons as
discussed above.
IV. Maritime Services Invoices
You claim that nautical charts are consumable supplies and
are not dutiable. There is no basis for this argument. Customs
has consistently held that nautical charts are considered a part
of a vessel's equipment; therefore, they are dutiable. Customs
Ruling 107782; MS 212.6C, May 11, 1967.
V. Key Marine Industries Ltd. Invoice
The electric motor is dutiable for the same reasons many
items in the Marco invoices, discussed above, are dutiable.
VI. Esso Imperial Oil Invoices
We find that the absorbent pads and flannel rags are
consumable supplies, which are not dutiable if not used to make
repairs. As to the items listed on invoice 995739, we find that
they are not duty free as part of the vessel's fuel costs.
HOLDING:
Most of the costs contained in the Aizawa Shipping Company
invoices are not subject to duty under 19 U.S.C. 1466 because the
work constituted a modification to the vessel.
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.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch