HQ 111691: Protest No. 2002-90-001858; Vessel Repair Entry No. C20- 0024672-1; OVERSEAS HARRIETTE V-110; Modification; U.S. Parts; Exchange Rate

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 111691

                        December 19, 1991

VES-13-18-CO:R:IT:C 111691 GEV

CATEGORY:  Carriers

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

RE:  Protest No. 2002-90-001858; Vessel Repair Entry No. C20-
     0024672-1; OVERSEAS HARRIETTE V-110; Modification; U.S.
     Parts; Exchange Rate

Dear Sir:

     This is in response to your memorandum dated May 6, 1991,
forwarding a protest regarding vessel repair entry no. C20-
002467-1.  Our ruling is set forth below.

FACTS:

     The OVERSEAS HARRIETTE is a U.S.-flag vessel owned by
Manufacturers Hanover Trust Co., New York, N.Y.  The subject
vessel underwent foreign shipyard work in Lisbon, Portugal,
during the period of August, 1989.  Subsequent to the completion
of the work the subject vessel arrived in the United States at
New Orleans, Louisiana, on September 14, 1989.  A vessel repair
entry was filed on September 21, 1989.

     A request for an extension of time to submit evidence of
cost and an application for relief was approved by Customs on
November 14, 1989, and the protestant was granted until December
13, 1989, to provide the necessary documentation.  An application
for relief dated December 20, 1989, with supporting documentation
was not received by Customs until December 21, 1989, eight days
after the extension expired.  In view of the untimeliness of the
submission, the application was denied in full on February 20,
1990.

     A petition for review of the denial of the application,
dated March 13, 1990, was timely filed.  By ruling 111022 RAH,
dated August 16, 1990, Customs held that a petition for review
received after denial of an application for relief due to an
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untimely submission may not be considered.  Accordingly, the
petition was denied, the entry was referred for immediate
liquidation, and the vessel operator was informed of the right to
file a protest under Part 174, Customs Regulations (19 CFR Part
174).  The entry was liquidated on August 22, 1990.  The ensuing
protest was filed on November 20, 1990.  Pursuant to a request
from the New Orleans Vessel Repair Liquidation Unit (VRLU), the
protestant, by letter dated April 16, 1991, provided additional
documentation specifying the particular items under protest.

     The following issues are raised in the protest:  (1) the
installation of an item as a nondutiable modification; (2) the
dutiability of various parts sent from the United States for use
in vessel repairs abroad; (3) the applicable exchange rate used
for converting foreign currency when calculating liquidated a
vessel repair entry.

ISSUES:

     1. Whether evidence is presented sufficient to prove that
the foreign work performed on the subject vessel for which the
protestant seeks relief constitutes modifications/alterations/
additions to the vessel so as to render the work nondutiable
under 19 U.S.C. 1466.

     2. Whether evidence is presented sufficient to prove that
various parts were sent from the United States for use in vessel
repairs abroad so as render their cost nondutiable under 19
U.S.C. 1466.

     3. Whether evidence is presented sufficient to prove that
labor used to install parts in a foreign shipyard was done by
U.S. residents so as to render the cost of such labor nondutiable
under 19 U.S.C. 1466.

     4. Whether the exchange rate of 1.8225 used by Customs for
converting British pounds in calculating the liquidated foreign
vessel repair entry under consideration was the correct rate.

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
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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-
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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 and Trade Act of 1990 (Pub. L. 101-382) which
amends 19 U.S.C. 1466, exempts from duty under the statute, the
cost of spare repair parts or materials which have been
previously imported into the United States as commodities with
applicable duty paid under the Harmonized Tariff Schedule of the
United States (HTSUS).  The amendment specifies that the owner or
master must provide a certification that the materials were
imported with the intent that they be installed on a cargo vessel
documented for and engaged in the foreign or coasting trade.

     The certification required by 19 U.S.C. 1466(h)(2) as to the
vessel's documentation (foreign or coasting trades) and service,
will be made by the master on the vessel repair entry (CF 226)
at the time of arrival.  The fact of payment of duty under the
HTSUS for a particular part must be evidenced as follows.  In
cases in which the vessel operator or a related party has acted
as the importer of foreign materials, or where materials were
imported at the request of the vessel operator for later use by
the operator, the vessel repair entry will identify the port of
entry and the consumption entry number for each part installed on
the ship which has not previously been entered on a CF 226.  In
cases in which the vessel operator has purchased imported
materials from a third party in the United States, a bill of sale
for the materials shall constitute sufficient proof of prior
importation and HTSUS duty payment.  This evidence of proof of
importation and payment of duty must be presented to escape duty
and any other applicable consequences.

     In addition, we require certification on the CF 226 or an
accompanying document by a person with direct knowledge of the
fact that an article was imported for the purpose of either then-
existing or intended future installation on a company's vessels.
Ordinarily, the vessel's master would not have direct knowledge
of that fact, and an agent may also be without such knowledge.
     Customs has in the past linked this duty remission
provision to the duty assessment provision in subsection (a) of
the statute.  In the face of argument to the contrary 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 a 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 other logical placement 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; it is 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 cost labor is dutiable.

     Uniform treatment will be accorded to parts sent from the
United States for use in vessel repairs abroad, regardless of
whether they are proven to be produced in the U.S., or have been
proven 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.

     The effective date of this amendment makes this section
applicable to any entry made before the date of enactment of this
Act that is not "finally liquidated" (i.e., for which a timely
protest was filed or court action initiated) on the date of
enactment of this Act, and any entry made--

          (A) on or after the date of enactment of this
              Act, and
          (B) on or before December 31, 1992.

     Since the subject entry has not been "finally liquidated" as
noted above, the new section 1466(h) is applicable to this entry
as it relates to spare parts.

     Upon reviewing the record we note that Wilson Walton invoice
no. 00017521 (Item A of the protest) covers the installation of
an impressed current system (ICCP) which supplemented the
existing system to provide adequate protection from galvanic
corrosion.  In addition, Lisnave invoice no. 1002/89/LISN, item
23 (Item B of the protest) covers the foreign shipyard labor
necessary for this installation.  These costs together evidence a
modification to the subject vessel and therefore are nondutiable.

     In regard to Items C, E, and F of the protest (Chris-Marine
U.S.A., Inc., invoice no. 2684, Williams & Wells invoice nos.
647181 and 647184, and Jotun Valspar Marine Coatings invoice 23-
43774), each one covers parts sent from the United States.  In
view of our interpretation of section 1466(h) as discussed above,
these parts are nondutiable.  Furthermore, the U.S. labor covered
in Chris-Marine invoice no. 2684 is nondutiable.

     Item D of the protest is an invoice from MATATEC Marine
Services Ltd. of Great Britain covering labor and parts.  The
protestant contends that the exchange rate used by Customs in
calculating this invoice for liquidation should have been 1.61
instead of 1.8225.  In regard to the conversion rate of foreign
currency used in liquidating entries of merchandise, pursuant to
19 CFR 159.32 (referencing 19 CFR 152.1(c)) the rate is that
which is in effect on the date of exportation (i.e., the actual
date the merchandise finally leaves the country of exportation
for the United States).   In regard to vessel repair entries, the
date of sailing (i.e., the date the vessel left the foreign
country where repair work was done) is considered the date of
exportation.  We note, however, that in view of the fact that the
OVERSEAS HARRIETTE never sailed from Great Britain (where the
MATATEC invoice originated) but from Portugal the exchange rate
is that which existed on the date of the invoice (February 10,
1989).  On that date the exchange rate for the United Kingdom as
set by the Federal Reserve Bank in New York was 1.8225.
Accordingly, Customs used the correct rate in converting British
pounds in liquidating this particular invoice.

HOLDINGS:

     1. Evidence is presented sufficient to prove that the
foreign work performed on the subject vessel for which the
protestant seeks relief constituted modifications/alterations/
additions to the vessel so as to render the work nondutiable
under 19 U.S.C. 1466.

     2.  Evidence is presented sufficient to prove that various
parts were sent from the United States for use in vessel repairs
abroad so as to render their cost nondutiable under 19 U.S.C.
1466.

     3.  Evidence is presented sufficient to prove that labor
used to install parts in a foreign shipyard was done by U.S.
residents so as to render the cost of the labor nondutiable under
19 U.S.C. 1466.

     4.  The exchange rate of 1.8225 used by Customs for
converting foreign currency in calculating the liquidated foreign
vessel repair duties under consideration was the correct rate.

     Accordingly, the protest is granted in part and denied in
part.

                                   Sincerely,




                                   Stuart P. Seidel
                                   International Trade
                                   Compliance Division