HQ 111331: Vessel repair; Modification; U.S. materials; Consumable supplies; Petition for review; Entry No. 424-0010068-3; Port of arrival, New Orleans, Louisiana, August 20, 1989

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 111331

                          June 22, 1991



VES-13-18-CO:R:IT:C  111331 LLB

CATEGORY:  Carriers

Deputy Assistant Regional Commissioner
Commercial Operations Division
423 Canal Street
New Orleans, Louisiana  70130-2341

RE:  Vessel repair; Modification; U.S. materials; Consumable
     supplies; Petition for review; Entry No. 424-0010068-3;
     Port of arrival, New Orleans, Louisiana, August 20, 1989

Dear Sir:

     This is in response to your memorandum of October 3, 1990,
which forwards for our determination a Petition for Review filed
by counsel on behalf of Sonat Offshore Drilling, Inc., owner of
the drilling rig SONAT GEORGE RICHARDSON.  The submission appeals
the findings in Customs Ruling Letter 110825 of May 10, 1990,
relating to the above-captioned vessel repair entry.

FACTS:

     Upon delivery as a new vessel constructed by Daewoo
Shipbuilding of Korea, the vessel was that same day (October 14,
1988) documented under the laws of the United States.  The next
day, the non-self-propelled drilling rig began a voyage under
tow to the Gulf of Oman.

     Numerous operations were performed upon the vessel while
aborad, and an Application for Relief from vessel repair duty was
filed which made two basic claims, one related to vessel
modification and the other to the installation of U.S.-made parts
and materials with the use of U.S. labor.

     The present submission expands the scope of the appeal for
relief.  Now before us are claims relating to purchases made
prior to documentation, modifications, U.S.-made parts, warranty
items, and freight charges and consumables.

ISSUE:

     Whether the new evidence presented substantiates the claims
made regarding pre-documentation purchases, modifications, U.S.
parts purchases, warranty repairs, and freight/consumable
charges.

LAW AND ANALYSIS:

     Title 19, United States Code, section 1466(a), 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 the foreign or
coastwise trade, or vessels intended to be employed in such
trade.

     A question exists as to whether certain of the items under
consideration are subject to duty under section 1466 as
equipment, or whether they might be considered non-dutiable
modifications.  In its application of the vessel repair statute,
Customs has held that modifications/alterations/additions 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 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.

    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.  Admiral Oriental,
          supra., (quoting T.D. 34150, (1914)).

     In the case of Sea-Land Service, Inc. v. United States, 683
F. Supp. 1404 (1988), the Court addressed whether repair work
performed on a newly constructed vessel subsequent to its
delivery to the owner might be considered to be part of the new
construction contract.  Simply put, the Court considered whether
"completion of construction" is a viable concept so as to render
the duty provisions of 19 U.S.C. 1466(a) inapplicable if proven.
The Court found completion of new construction to be a valid
concept, subject to specific conditions, which are:

     1.   "All work done and equipment added [must be] pursuant
          to the original specifications of the contract for the
          construction of the vessel ...."

     2.   "This basic standard is limited to work and equipment
          provided within a reasonable period of time after
          delivery of the vessel."

     Upon reviewing the case on remand from the Court, Customs
found that the court-ordered criteria had been satisfied and that
the "reasonable period of time" for the warranty period was the
one-year period specified in the contract.  We have since held
likewise in similar cases, and have adopted the one-year limit as
the benchmark for honoring new construction warranties which
otherwise qualify.

     On August 20, 1990, the President signed into law the
Customs and Trade Act of 1990 (Pub. L. 101-382), section 484E of
which amends the vessel repair statute by adding a new subsection
(h).  Subsection (h) has two elements, which are as follows:

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

          (1) the cost of any equipment, or any part of
          equipment, purchased for, or the repair parts
          or materials to be used, or the expense of
          repairs made in a foreign country with
          respect to, LASH (Lighter Aboard Ship) barges
          documented under the laws of the United
          States and utilized as cargo containers, or

          (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.

     The effective date of the amendment is stated as follows:

          Effective Date.--The amendment made by this
          section shall apply to--

          (1) any entry made before the date of
          enactment of this Act that is not liquidated
          on the date of enactment of this Act, and
          (2) any entry made--
               (A) on or after the date of enactment of this
                   Act, and
               (B) on or before December 31, 1992.

      Subsection (d)(2) of section 1466 provides that:

          (d) If the owner or master of such vessel
          furnishes good and sufficient evidence
          that...

          (2) such equipments or parts thereof or
          repair parts or materials, were manufactured
          or produced in the United States, and the
          labor necessary to install such equipments or
          to make such repairs was performed by
          residents of the United States, or by members
          of the regular crew of such vessel...

          then the Secretary of the Treasury is authorized to
          remit or refund such duties...


     Customs has in the past linked this duty remission
provision to the duty assessment provision in subsection (a) of
the statute.  We have held that a two-part test must be met in
order for remission of duty to be granted:  first, that the
article must be of U.S. manufacture; and, second, it must be
installed by U.S.-resident or regular vessel crew labor.  The
reason for this position is that (d)(2) refers to "such
equipments or parts...", etc., without any logical association
for the word "such" occurring in that subsection. We inferred
that "such" articles must refer to those installed under
subsection (a), absent any other reasonable predication.  The new
amendment puts this issue to rest by making it clear that as
concerns foreign-made parts imported for consumption and then
installed on U.S. vessels abroad, the labor required for their
installation is separately dutiable.  A part may now be
considered exempt from vessel repair duty albeit the foreign
labor cost is dutiable.

     In all cases which meet the conditions imposed by the
statutory amendment, uniform treatment will be accorded to parts
sent from the United States for use in vessel repairs abroad.
This will be so regardless of whether they are proven to have
been produced in the U.S., or to have been imported and entered
for consumption with duty paid.  In both cases, the cost of the
materials is duty exempt and only the cost of foreign labor
necessary to install them is subject to duty.  Crew member or
U.S.-resident labor continues to be free of duty when warranted,
in cases which qualify under the new law.

     Customs has held that work performed aboard a vessel in a
foreign shipyard prior to its documentation under United States
law may be subject to duty under the vessel repair statute.  The
circumstances surrounding its eventual documentation will
demonstrate whether it was "intended to be employed" in either
the foreign or coastwise trade at the time that foreign shipyard
work was performed.  In this case, since vessel delivery and
vessel documentation occurred simultaneously, duty applies.

     "Consumable Supplies" are generally defined as supplies for
the consumption, sustenance, and medical needs of the crew and
passengers during the voyage.  H.E. Warner, Trustee v. United
States, 28 CCPA 143, and Customs Memorandum 107323 of May 21,
1985.  Consumable supplies generally are not subject to vessel
repair duty, unless used in effecting dutiable repairs (C.I.E.
196/60).  Likewise, the expense of transporting materials and
parts (freight charges) to foreign repair sites has long been
held to be non-dutiable, regardless of whether the operation
accomplished with the use of the transported articles is
dutiable.



     In applying the law and precedents previously discussed to
the particular facts of this matter, we have reached certain
conclusions, which are as follows:

Warranty Claims

     None of the claims made on the basis of the existence of a
valid warranty are sustainable.  Although all operations were
performed on the vessel within one year of its delivery from the
vendor to the operator, there is no showing, other than bald
unsupported claims, that the operator was reimbursed by the
builder for the operations performed.  Since the work reported is
shown to have been performed by unrelated repair facilities, with
payment having been made by the owner, some showing of
acknowledgement of liability for payment on the part of the
original builder is necessary.  Since such is not evident, the
warranty claims must be denied.

Pre-Documentation Purchase Claims

     The record shows that the vessel was issued a Certificate of
Documentation on October 14, 1988.  Taking this fact into
account, and after reviewing the documentary evidence, we find
that the claims made under this theory are not supported by the
evidence.

United States-Made Materials

     Since the vessel in this case is not a cargo vessel, it may
not benefit from the enactment of section 1466(h), the spare
parts provision.  As such, the purchase of parts and materials is
governed by the pre-existing and long-standing precedents of the
Customs Service.  Taking these rules in consideration, we find
that the claims made in this case are all supported by the
evidence, with the following exceptions:

     Items 28k, 28o, 29, and 51.  There is no proof in the file
that these items were manufactured in the United States.

Modifications to the Hull and Fittings

     After reviewing the evidence presented, we find that the
claims of duty-free modification or alteration are sustained,
with the following exceptions:

     Items 9, 10, 11, 12, 13, 14-20, 23, and 24-27.  It is
claimed that these items, while not themselves modifications,
were purchased for the purpose of working on modifications.
There is no evidence that these purchases were made to assist in
non-dutiable modification work only, and were not used to assist
in completing dutiable operations as well.  As such, claims made
covering these items must be denied.

Freight Charges and Consumable Supplies

     After reviewing the evidence presented, we find that the
claims made regarding freight and consumables are sustained,
with the following exception:

     Item 41.  Rust remover, for use prior to painting, is a
repair/maintenance-related item which is dutiable.

HOLDING:

     Following a thorough review of the facts and evidence, and
after an analysis of the law and applicable precedent decisions,
we have determined to partially allow and partially deny the
Petition for Review, as specified in the law and analysis portion
of this decision.

                            Sincerely,




                            Stuart P. Seidel
                            Director, International
                            Trade Compliance Division