HQ 112638: Vessel Repair; Warranty; Modification; Staging; Transportation; 19 U.S.C. 1466; M/V PRESIDENT ADAMS, V-25; Protest No. 2704-93-100626.

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 112638

                        September 7, 1994

VES-13-18   CO:R:IT:C  112638 BEW

CATEGORY:   Carriers

Deputy Regional Director
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, CA 90831

RE:  Vessel Repair; Warranty; Modification; Staging;
     Transportation; 19 U.S.C.  1466; M/V PRESIDENT ADAMS, V-25;
     Protest No. 2704-93-100626.

Dear Sir:

This letter is in response to memoranda from your office which 
forwarded for our review the above-referenced protest on the
liquidation of the vessel repair entry filed for the M/V
PRESIDENT ADAMS, Voyage 25.

FACTS:

The vessel PRESIDENT ADAMS arrived at the port of San Pedro,
California, on March 23, 1991, and filed a timely vessel repair
entry.  The entry indicates the vessel had foreign shipyard work
while in Japan, Taiwan, and Hong Kong.  The entry also indicates
that during the course of its foreign voyage, the vessel called
in Singapore where it underwent extensive repair and modification
procedures.  An application for relief was filed, and this
application was allowed in part and denied in part (Headquarters
Ruling Letter 111793 LLB, dated December 24, 1991).  A petition
for review was subsequently filed that was likewise allowed in
part and denied in part (Headquarters Ruling Letter 112214 GEV,
dated September 16, 1992).  The vessel operator now files a
protest in which it seeks relief for items it identifies as non-
dutiable as warranty or modification work.  It also provides
clarification on the method by which it segregated staging and
transportation costs.  

ISSUES:

(1)  Whether work claimed to have been performed pursuant to
warranty is subject to duty in this case.

 (2) Whether certain work performed to the vessel in Jurong
Shipyard resulted in modifications to the vessel and is therefore
not subject to duty under 19 U.S.C.   1466.

(3)  Whether items identified as staging and transportation are
properly segregated and exempt from duty under 19 U.S.C.   1466.

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.

In the case of Sea-Land Service, Inc. v. United States, 683 F.
Supp. 1404 (CIT 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.  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."

The contract for construction of the vessel under consideration
in that case contained clauses guaranteeing for twelve months any
area of the vessel for which the builder accepted responsibility
under the contract and specifications, conditioned upon written
notification from the owner of any covered defect within the
agreed upon twelve-month period.

In reviewing the warranty case on remand from the court, Customs
had the opportunity to review the contract, the specifications,
and a so-called "guarantee notebook."  This document consisted of
numerous guarantee items, some generic in nature and some
specific, and represented the written notification of defects
from the owner to the builder as required by the contract.  In
that case, we 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 bench mark for honoring new
construction warranties which otherwise qualify.

In the present case, the protestant seeks relief for claimed
warranty work performed on the bow (Jurong Invoice Item 3.3-2),
the hatch covers (Jurong Invoice Item 3.3-10), and the #1 and #2
hatch longitudinal coaming terminations (Jurong Invoice Item 3.3-
14).  These operations were performed between February 20, 1991,
and March 7, 1991.  In a letter dated December 21, 1990, American
President Lines stated to Customs that the PRESIDENT ADAMS was
delivered on September 30, 1988.  The guarantee clause Article 18
of the construction contract reads as follows:  

     (a)  Subject to the provisions of this ARTICLE 18,
     Contractor guarantees each Vessel for a period of (1) year
     from the date of delivery of such Vessel under Article 17
     (the "Guarantee Period") . . .

     (c)  Notwithstanding any inspection or failure to reject by
     the Purchaser or any Regulatory Body pursuant to this
     Contract, if at any time within the Guarantee Period with
     respect to any vessel there shall appear, exist or be
     discovered any Deficiency, and Purchaser gives Contractor
     notice specifying such Deficiency within 30 days after the
     end of the Guarantee Period with respect to such Vessel orif the Vessel is at sea at the end of such period not to
     exceed 10 days after expiration of the normal guaranty
     period (except as otherwise provided in this contract), such
     Deficiency shall, upon written demand by Purchaser, be
     corrected at the sole cost and expense of Contractor . . .

The warranty provisions are conditioned upon timely written
notice being given by the owner to the shipyard within 30 days
following the expiration of the warranty period, or if the vessel
is at sea in a period not to exceed 10 days after expiration of
the normal guarantee period, except as otherwise provided in the
contract.

The record contains two letters dated October 28, 1991, addressed
to Howaldtswerke-Dautsche Werft and Bremer Vulkan AG referencing
the Bremer Vulkan Hull Nos. 43 and 44 (Hatch Covers and
Coamings).  The correspondence states that notice of the
deficiency relating to the APL C10 Class Containerships' hatch
cover and coaming problems was given on or about February 10,
1989 (APL letter S/N 1362 JCL\HCW).  In one of the October 28,
1991, letters it is states that in the summer of 1989, the hatch  cover subcontractor, MACOR, completed the work on the PRESIDENT
ADAMS on September 27, 1989.  An Article 18 "Guarantee
Settlement" was executed between APL and Bremer Vulkan A.G. on
May 9, 1990.  Based on these documents, we find that notice of
the deficiency was given timely; that the repair work was
performed to correct the deficiency; and that a settlement was
entered into in 1990. 

The record reveals that on November 22, 1989, Bremer Vulkan AG
was notified that the subject vessel was experiencing shell and
internal structure damage, and that the damage repairs made in
September 1989 had not resolved the problems.  The repairs in
items 3.3-2, 3.3-10 and 3.3-14 were performed in 1991.  These
repairs were made beyond the warranty contract and settlement
dates.  The protestant submitted a letter which indicates that
Bremer Vulkan AG has acknowledged that certain items were
warranty claims that have been settled.  In support of this
contention, APL submitted an invoice which indicates that
$300,000 has been paid to APL in final settlement of the warranty
claims.  The documentation shows that a refund of $150,000
relating to the PRESIDENT ADAMS repairs has been made.  In a
letter dated August 3, 1994, the protestant submitted a breakdown
of the $150,000 refund as follows:

     Item No. 3.3-2 -    Bow Damage - $2,505, refund amount
                         $2,505
          
     Item No. 3.3-10 -   Hatch Covers - $78,891, refund amount
                         $78,891
     
     Item No. 3.3-14 -   #1 and #2 hatch longitudinal coaming    
                                        termination - $98, refund
                         amount $98
     
     Item No. 3.3-9 -    Ballast Tank Coatings - repair cost
                         $100,373, refund amount $68,506 

The protestant alleges that item 3.3-9 - Ballast Tank Coatings
was "time barred" under the warranty, however, Bremer Vulkan
recognizes some obligation and refunded, in addition to the above
amounts for items 3.3-2, 3.3-10, and 3.3-14, an additional amount
of $68,506.  This amount is applied toward item 3.3-9 Ballast
Tank Coatings.  Item 3.3-9 was found dutiable in ruling No.
112214 GEV, dated September 16, 1992.

Under 19 U.S.C.   1466, equipments, or any part thereof,
including boats, purchased for, or the repairs parts or materials
to be used, or the expenses of repairs made in a foreign country  are subject to duty.  When foreign vessel repairs are made, and a
refund of the cost is made to the vessel owner, these repair
costs are not subject to duty.  Accordingly, we find that the
amount of $150,000, the refund associated with the PRESIDENT
ADAMS, is non-dutiable under the statute.  Please liquidate the
cost associated with items 3.3-2, 3.3-10, 3-3-14 and 3.3-9 as
outlined above.

II.  MODIFICATION CLAIMS

The protestant also seeks relief from duty for other items as
modifications to the vessel.  

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
modification processes 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.  This element should not be given
     undue weight in view of the fact that vessel components must
     often be welded or otherwise "permanently attached" to the
     ship because ships are subject to constant pitching and
     rolling.  In addition, some items, the cost of which is
     clearly dutiable, operate with other vessel components,
     resulting in the need, possibly for that purposes alone, for
     a fixed and stable attachment to those vessel parts.  It
     follows that a "permanent attachment" may take 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-
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 Service has held that the decision in each case as to
whether an installation constitutes a nondutiable
modification/alteration/addition to the hull and fittings of a
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 evidence regarding the specific item
submitted for our consideration, we find the following:

     Jurong Shipyard Item 3.3-19:  Removal of Bow Thruster Bars:

          This item involved the removal of the strainer bars on
          the port and starboard side shell.  No repairs were
          made.  The item represents an alteration in the design
          of the vessel that may be characterized as an
          improvement.  The cost of this item is not subject to
          duty.

III. STAGING AND TRANSPORTATION

Finally, the protestant seeks relief for staging and
transportation costs that were held dutiable in our ruling on the
application for relief.   In this earlier ruling, we stated that,
from the invoice, we could not determine whether the staging or
transportation costs included with particular items were included
in the  total cost for that item or were a separate charge. 
Headquarters Ruling Letter 111793, dated December 24, 1991.  By
letter dated January 14, 1993, Jurong Shipyard clarifies the
invoice by stating that these costs are separate charges. 
Therefore, the costs for staging or transportation for the
following items are not subject to duty:

     Jurong Shipyard Item 3.3-11:  Cargo Hold D & H Vent    
     Modifications.

     Jurong Shipyard Item 3.4-11:  No. 4 Stdb F.O. Cracks and    
     Other Steel Work.

     Jurong Shipyard Item 5.4-11:  Fire Pump Sea Valves

     Jurong Shipyard Item 3.1-6:   Capac/Chloropac System

HOLDING:  

Following a thorough review of the evidence submitted as well as
analysis of the applicable law and precedents, we have determined
that the Protest should be allowed as set forth in the Law and
Analysis portion of this ruling.

 In accordance with  3A(11)(b) of Customs Directive 099 3550-065,
dated August 4, 1993, Subject:  Revised Protest Directive, this
decision should be mailed by your office to the protestant no
later than 60 days from the date of this letter.  Any new billing
(the equivalent of the reliquidation of an entry) in accordance
with the decision must be accomplished prior to mailing of the
decision.  Sixty days from the date of the decision the Office of
Regulations and Rulings will take steps to make the decision
available to Customs personnel via the Customs Rulings Module in
ACS and the public via the Diskette Subscription Service, Freedom
of Information Act and other public Access channels.

                              Sincerely,




                              Stuart P. Seidel
                              Director, International Trade 
                              Compliance Division