HQ 111772: Vessel Repair; 19 U.S.C. 1466; Modification; Survey; Parts

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 111772

                        October 10, 1991

VES-13-18-CO:R:IT:C 111772 RAH

CATEGORY:  Carriers

Chief, Technical Branch
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, California 90731

RE:  Vessel Repair; 19 U.S.C.  1466; Modification; Survey; Parts

Dear Sir:

     This is in response to your memorandum of June 18, 1991,
regarding the M/V RESOLUTE.

FACTS:

     The record reflects that the M/V RESOLUTE arrived at the
port of Dutch Harbor, Alaska, on December 26, 1990.  Vessel
repair entry number C31-0007666-1 was filed on March 22, 1991,
reflecting work performed on the vessel in Ishinomake, Japan,
from October 19, 1990, to December 15, 1991.

     The MV RESOLUTE was built in Ameli, Louisiana, in 1973.  She
was converted to a head and gut factory trawler in Seattle,
Washington, in 1989.  The vessel was converted into a pollock
fillet processing vessel at Ishinomake, Japan, on October 19,
1990.  The applicant claims that the primary modifications
performed by Yamanishi Shipbuilding & Iron Works, Ltd. consisted
of: installation of the roe and fillet units; modification of
existing conveyors and permanent installation of the additional
conveyors to accommodate the roe and fillet units; modification
of piping and hydraulic systems to accommodate the roe and fillet
units; conversion of bathroom to storeroom; modification of crew
quarters by installation of additional bunks and facilities for
added crew; installation of post and cargo boom; construction and
installation of permanent freeze pan racks and refrigeration
modifications; installation of additional electronic units.

     Additionally, the applicant seeks relief for various surveys
performed and parts installed on the vessel.
                              - 2 -

     The subject of this ruling is an application for relief
dated March 18, 1991, and a supplemental application dated June
7, 1991.  You specifically ask our advice on the invoices from:
Yamanishi Shipbuilding and Iron Works; Det. Norske Veritas;
Kawasaki Hydraulics Co., Ltd.; Fujita Tekkosho Co., Ltd.; MK and
Furuno Electric Co. Ltd.; Nippon Fillestar Co., Ltd.; Mikasa
Trading Co., Ltd.

ISSUES:

     Whether the work in question performed on the vessel to
convert her into a pollock fillet processing vessel constitutes
dutiable repairs under 19 U.S.C.  1466, or non-dutiable
modifications.

     Whether the surveys performed by Det. Norske Veritas are
dutiable under 19 U.S.C.  1466.

     Whether the parts for which the applicant seeks relief are
dutiable under 19 U.S.C.  1466(h).

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.

     Over the course of years, the identification of modification
processes has evolved from judicial and administrative prece-
dents.  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
                              - 3 -

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 hull and
fittings took place for the purposes 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 an 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.

     In the instant case, we have reviewed the Yamanishi
Shipbuilding and Iron Works Ltd. worksheets containing 110 pages
                              - 4 -

handwritten in Japanese (accompanied by a certified
translation),  and find that the following items constitute duty
free modifications:  1, 2, 6, 8-41, 45-51, 53, 55, 60-63, 71-75,
77-90, 93, 94,97-108, 109.

       On the other hand, the following items constitute
dutiable repairs:  52; 54; 56; 64-70; 76; 85; 91 and 92.

     Items 5 and 7 constitute dutiable equipment.

     Items 95 and 96 are dutiable because they are not
accompanied by a translation.

     Several items listed on shipyard worksheets furnish a brief
characterization of the service provided but do not contain a
description of the actual work performed.  For example, item 3
merely states "modify bathroom in storeroom."   Accordingly, we
find the following items dutiable: 3; 4; 34; 43; 44; 57; 58 and
59.  Likewise, items 1-6 on the Kawasaki Hydraulics Co., Ltd.
invoice are dutiable.

     With regard to the Fujita Tekkosho Co. Ltd. invoice, items
1-14 cover a permanently affixed belt conveyor system that is an
integral part of the new trade operation of the vessel and are
part of the non-dutiable modifications.  Item 1 on the Nippon
Fillestar Co., Ltd. invoice is also part of the non-dutiable
modifications.

     The applicant claims that the MK invoice is comprised of
transportation charges which are non-dutiable.  The MK invoice
description is for "shipping cargo" to the M/V RESOLUTE at
Yamanishi Zosen, Ishinomaki.  Customs has long held that
shipping, crating, and packing are non-dutiable.  C.D. 1830.
Hence, we find the shipping charges on the MK invoice non-
dutiable.

     Concerning the Mikasa Trading Co., Ltd. invoice, the search
light and socket for search light constitute dutiable equipment.
The light bulbs are non-dutiable supplies.

     Furthermore, the applicant contends that the three Furuno
Electrico, Ltd. invoices cover electronic items, imported into
the United States, duty paid under the U.S. Tariff Schedules, and
placed aboard the vessel prior to departure to Japan, and the
under the provisions of H.R. 1594, only the costs of installation
are dutiable.

     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) provides in part:
                              - 5 -

     (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. (Emphasis added).

     Since the M/V RESOLUTE is not a cargo vessel it is not
governed by subsection (h).  Thus, in order to receive duty-free
treatment the spare parts in question must comply with 19 C.F.R.
 4.14(c)(3)(ii).  That provision provides for remission or
refund of duty if:

          The equipment, equipment parts, repair parts
          or materials used on the vessel were
          manufactured or produced in the Untied States
          and purchased by the owner of the vessel in
          the United States, and the labor necessary to
          install such equipment or to make such
          repairs was performed by residents of the
          United States or by members of the regular
          crew of the vessel.

     In the instant case, Furuno Electric Co., Ltd. invoice nos.
SFE/90/I-162, 163 and 164 show that the parts in question were
sent from Kobe, Japan to Seattle, Washington, for the F/V
RESOLUTE.  There is also an invoice from customs brokers covering
the costs of estimated duties, fees and services for the
consumption entry (entry #603-00712031-5) pertaining  to the
parts in question.  There is no evidence that the parts were
manufactured or produced in the United States or that they were
installed by U.S. residents or regular members of the crew.
Accordingly, the parts on the Furuno Electrico Co. Ltd. invoice
are dutiable.

     Finally, the applicant asserts that the Det Norske Veritas
surveys are non-dutiable.  C.S.D. 79-277 stated, "[i]f the survey
was undertaken to meet the specific requirements of a
governmental entity, classification society, insurance carrier,
                              - 6 -

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 A.B.S. or Coast Guard invoice (the actual cost of the
inspection), 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
A.B.S. 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, 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 (emphasis added).

     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 A.B.S. was exempted
from duty.  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 are necessary.  Although the invoice indicates
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 American Bureau of Shipping
(A.B.S.).  In the liquidation process, Customs should go beyond
                              - 7 -

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.

     Turning to the case before us, although we do not find any
proof that the surveys were required it is apparent that they
were performed in conjunction with the conversion of the vessel
from a head and gut factory trawler into a pollock fillet
processing vessel.  Therefore, we find the surveys to be non-
dutiable as part of the modifications.

HOLDINGS:

     The work in question performed on the vessel to convert her
into a pollock fillet processing vessel includes both dutiable
repairs under 19 U.S.C.  1466, and non-dutiable modifications,
as discussed above.

     The surveys performed by Det. Norske Veritas are non-
dutiable under 19 U.S.C.  1466.

     The parts on the Furuno Electrico Co., Ltd. invoice for
which the applicant seeks relief are dutiable under 19 U.S.C.
1466(h).

                                   Sincerely,



                                   B. James Fritz
                                   Chief
                                   Carrier Rulings Branch