HQ 112732: Vessel Repair; Application for Relief; Modification; Inspection; Spare Parts Vessel Repair Entry: 559-1237243-4 Date of Arrival: September 4, 1991 Port of Arrival: Boston, Massachusetts Vessel: ILE DE FRANCE V-39

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                              HQ 112732

                            July 8, 1993

VES-13-18-CO:R:IT:C  112732 DEC

CATEGORY:  Carriers

Deputy Assistant Regional Commissioner
Classification and Value Division
Attention:  Residual Liquidation and Protest Branch
New York, New York  10048-0945

RE:  Vessel Repair; Application for Relief; Modification;
     Inspection; Spare Parts 
     Vessel Repair Entry:  559-1237243-4
     Date of Arrival:  September 4, 1991
     Port of Arrival:  Boston, Massachusetts
     Vessel:  ILE DE FRANCE V-39

Dear Sir:

     This is in response to your memorandum dated May 14, 1993,
which forwards the application for relief from vessel repair duties
filed in connection with the above-referenced vessel for our review.

FACTS:

     The ILE DE FRANCE is owned by the Connecticut National Bank and
operated by Sea-Land Service, Inc.  It is an American-flag vessel. 
While abroad, the ILE DE FRANCE stopped in Rotterdam where it
underwent various operations.  The following items have been
submitted for our review.

     Wilton Fijenoord Invoice                  W.B. Arnold Co., Inc.
 (Invoice No. 6955/10925 (8/30/91)                  Invoice No.
           Item No.                                                 
           114       52e                           21157 (10/25/91)
           121       76c                           19600 (4/10/90)
           23b       109b
           33c       118b
           51e

An application for relief from vessel repair duties dated October
31, 1991, was timely filed.


ISSUE:

     Whether the cost of foreign shipyard work completed aboard the
subject vessel is dutiable pursuant to Title 19, United States Code,
section 1466.


                                  -2-


LAW AND ANALYSIS:

     Title 19, United States Code, section 1466(a) provides, in
pertinent part, for payment of a fifty percent ad valorem duty on
the cost of foreign repairs to a vessel documented under United
States law to engage in the foreign or coastwise trade, or to a
vessel intended to be employed in such trade.


Items 114 and 121

     The applicant contends that the costs of the operations
performed under these two items are not subject to duty because they
are modifications and represent permanent incorporations into the
vessel.  The applicant received an advisory ruling from Customs
holding that the upgrade of the existing seven Bar service
compressor to a thirty Bar topping-up air compressor would
constitute a modification.  In its advisory ruling letter, Customs
did note that "any final ruling on this matter is contingent on
Custom's review of the evidence submitted pursuant to section
4.14(d)(1), Customs Regulations (19 CFR 4.14(d)(1)."  Headquarters
Ruling 110993 (May 2, 1990).

     Over the course of years, the identification of modification
processes has evolved from judicial and administrative precedents. 
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.

           (2)  Whether the item under consideration would remain   
                aboard a vessel during an extended layup.

           (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.

Before an item is to be construed as a part of the vessel, it must
be (1) a permanent attachment and (2) essential to the successful
operation of the vessel.   Otte v. United States, 7 C.C.P.A. 166,
169 (1916).
                                 -3-

     Item 114 details operations performed upon the vessel's air
compressor.  While the applicant contends that this item represents
a modification, the Customs Service finds that this item contains,
in part, repair operations as evidenced in the invoice description
indicating that various items were being renewed or overhauled. 
Customs has consistently held that where the charges for dutiable
and non-dutiable items are not segregated within an invoice item,
all of the charges in that invoice item must be deemed dutiable. 
Customs Memorandum 108567 (Sept. 10, 1986).  Absent authenticated
evidence segregating the various costs associated with this item,
the $8951 remains dutiable.  

     Item 121 describes an expense associated with the removal of
electric cables and the installation of new cables.  To determine
whether a particular replacement operation is a modification as
opposed to a repair, the appropriate inquiry is to analyze the
condition of the structure(s) prior to being replaced.  Customs has
determined that even though an operation might, under normal
circumstances, be considered a permanent duty-free modification, the
benefit of such a finding is not extended to operations which
encompass the replacement of existing structure(s) that are in need
of repair at that time.  If a permanent addition is a first-time
installation, or if it replaces an existing structure that is in
good working order at the time of its replacement and an enhancement
in operating efficiency is provided, the operation may be considered
a duty-free modification.  Headquarters Ruling 111224 (Feb. 19,
1991).

     The Customs Service is not satisfied that the replacement of
these electric cables is a modification.  The evidence submitted
does not address the condition of the cables at the time they were
replaced.  Consequently, the Customs Service has no way of
evaluating whether this item is a repair or a modification.  Unless
and until such authenticated evidence attesting to the condition of
the cables at the time of their replacement is submitted, relief
with respect to this item is denied.

W.B. Arnold Co., Inc., Invoice No. 21157

     This invoice is for work performed on the vessel's air
compressors.  While the general concept of upgrading the air
compressor would be considered a modification, as indicated to the
applicant in Headquarters Ruling 110993 (May 2, 1990), the actual
description of the work associated with this concept included repair
work to various items as described in items 114 and 121.  Since
invoice 21157 is for work performed on the vessel's air compressor,
which has been ruled dutiable (see items 114 and 121 above), the
labor charge included in this invoice is dutiable as well.  

     Transportation and lodging costs are ordinarily accorded duty-
free treatment provided that the costs are properly segregated in
the invoice.  Consequently, the costs of items one, three, and four
which are for traveling, air fare, and various expenses,
respectively, are not subject to duty.
                                 -4-

W.B. Arnold Co., Inc., Invoice No. 19600

     This invoice represents the acquisition of various kits
containing items to be used for the upgrading of the vessel's air
compressors.  Since the items are of foreign origin, Sea-Land has
included proof that the merchandise entered the United States, duty-
paid.  

     On August 20, 1990, the President signed into law Pub. L. 101-
382, section 484E of which amends section 466, Tariff Act of 1930,
as amended (19 U.S.C. 1466), by adding a new paragraph (h) to the
statute 19 U.S.C. 1466(h).

     Section 1466(h) provides in pertinent part that:

           (h)  The duty imposed by subsection (a) of this section
                shall not apply to--

                (2) the cost of spare repair parts or materials
                (other than nets or nettings) which the owner or
                master of the vessel certifies are intended for use
                aboard a cargo vessel, documented under the laws of
                the United States and engaged in the foreign or
                coasting trade, for installation or use on such
                vessel, as needed, in the United States, at sea, or
                in a foreign country, but only if duty is paid under
                appropriate commodity classifications of the
                Harmonized Tariff Schedule of the United States upon
                first entry into the United States of each such
                spare part purchased in, or imported from, a foreign
                country.

     While section 1466(h) applies by its terms only to foreign-
made imported parts, there is ample reason to extend its effect to
U.S.-made materials as well.  To fail to do so would act to
discourage the use of U.S.-made materials in effecting foreign
repairs since continued linkage of remission provisions of
subsection (d)(2) with the assessment provisions of subsection (a)
of section 1466 would obligate operators to pay duty on such
materials unless they were installed by crew or resident labor.  

     If an article is claimed to be of U.S. manufacture, there must
be proof of its origin in the form of a bill of sale or domestic
invoice.  If a foreign manufactured article is claimed to have been 
previously entered for consumption, duty paid by the vessel
operator, there must be proof of this fact in the form of a
reference to the consumption entry number for that previous
importation, as well as to the U.S. port of importation.  If
imported articles are purchased in the United States from a party
unrelated to the vessel operator, a domestic bill of sale to the
vessel operator must be presented.  

     Further, with regard to imported articles, there must be
presented a certification on the CF 226 or an accompanying document
                                 -5-


by a person with direct knowledge of the fact that an article was
imported or purchased for the purpose of either then-existing or
intended future installation on a company vessel.  Ordinarily, the
vessel's master would not have direct knowledge of that fact, and an
agent may also be without such knowledge.  The second certification
required by 19 U.S.C.  1466(h)(2) as to the vessel's documentation
(foreign or coasting trades) and service (cargo vessel), will be
made by the master on the vessel repair entry (CF 226) at the time
of arrival.

     If the elements stated above are proven to the satisfaction of
the Customs Service, the cost of foreign labor utilized for the
installation of U.S.-made or previously imported articles will be
subject to duty under section 1466 in matters concerning repairs,
and only the cost of qualifying materials used in repairs will be
free of duty.

     This section (19 U.S.C. 1466(h)) applies to entries that were
made before the date of enactment (August 20, 1990)) that have not
been liquidated.  Consequently, the petitioner's claim for relief
from vessel repair duties is, appropriately, considered in light of
the provisions contained within 19 U.S.C.  1466(h).

     Since the applicant has provided a consumption entry evidencing
payment of duty, relief with respect to this item is granted. 


Items 33c, 51e, and 52e

     These three items represent the costs for removals which are
all related to dutiable work.  Item 33c relates to repairs performed
on the bilge suction valve, Item 51e relates to repairs performed on
the portside number two lower wingtank, and Item 52e relates to
repairs performed on the starboard number two lower wingtank.  Since
these items are integrally related to the respective repairs, each
of these items is dutiable. 


Items 23b, 76c, 109b,  and 118b


     The applicant contends that the duty on the cost of the four
above-referenced items that relate to charges for inspections should
be remitted.  In C.S.D. 79-277, the Customs Service addressed the
dutiability of surveys/inspections stating that "[i]f the survey was
undertaken to meet the specific requirements of a governmental
entity, classification society, insurance carrier, etc., the cost is
not dutiable even if dutiable repairs were effected as a result of
the survey."

     With increasing frequency, this ruling has been utilized by
vessel owners seeking relief not only from charges appearing on an
ABS or U.S. Coast Guard invoice (the actual cost of the inspection),
                                 -6-


but also as a rationale for granting non-dutiability to a host of
inspection-related charges appearing on a shipyard invoice.  In
light of this continuing trend, we offer the following
clarification.

     C.S.D. 79-277 discussed the dutiability of certain charges
incurred while the vessel underwent biennial U.S.Coast Guard and ABS
surveys.  That case involved the following charges:

                Item 29
                     (a)  Crane open for inspection.
                     (b)  Crane removed and taken to shop.  Crane
                          hob and hydraulic unit dismantled and
                          cleaned. 
                     (c)  Hydraulic unit checked for defects, OK. 
                          Sundry jointings of a vessel's spare
                          renewed.
                     (d)  Parts for job repaired or renewed.
                     (e)  Parts reassembled, taken back aboard ship
                          and installed and tested.

     In conjunction with the items listed above, we held that a
survey undertaken to meet the specific requirements of a
governmental entity, classification society, or insurance carrier is
not dutiable even when dutiable repairs are effected as a result of
the survey.  We also held that where an inspection or survey is
conducted merely to ascertain the extent of damages sustained or
whether repairs are deemed necessary, the costs are dutiable as part
of the repairs which are accomplished.
     
     It is important to note that only the cost of opening the crane
was exempted from duty by reason of the specific requirements of the
U.S. Coast Guard and the ABS.  The dismantling and cleaning of the
crane hob and hydraulic unit was held dutiable as a necessary
prelude to repairs.  Moreover, the testing of the hydraulic unit for
defects was also found dutiable as a survey conducted to ascertain
whether repairs were necessary.  Although the invoice indicated that
the hydraulic unit was "OK," certain related parts and jointings
were either repaired or renewed.  Therefore, the cost of the testing
was dutiable.

     We emphasize that the holding exempts from duty only the cost
of a required scheduled inspection by a qualifying entity (such as
the U.S. Coast Guard or the ABS).  In the liquidation process,
Customs should go beyond the mere labels of "continuous" or ongoing 
before deciding whether a part of an ongoing maintenance and repair
program labelled "continuous" or "ongoing" is dutiable.

     Moreover, we note that C.S.D. 79-277 does not exempt repair
work done by a shipyard in preparation of a required survey from
duty.  Nor does it exempt from duty the cost of any testing by the
shipyard to check the effectiveness of repairs found to be necessary
by reason of the required survey. 
                                 -7-

     
     The applicant has submitted a copy of the various ABS surveys
performed upon the vessel.  Following the rules set forth above, the
Customs Service finds that Item 23b (inspection and testing of
rudder), Item 76c (inspection of sterntube bearings), Item 109b
(inspection of the vessel's seachests), and Item 118b (inspection of
starboard bilge keel) to be non-dutiable because they are a part of
a required scheduled survey.


HOLDING:

     After a thorough review of the submitted evidence, this
application for relief is granted, in part, and denied, in part, for
the reasons detailed in the Law and Analysis section of this ruling.

                                Sincerely,




                                Acting Chief
                                Carrier Rulings Branch