HQ 112714: Vessel Repair; Petition for Review; Modification; Inspections; Spare Parts; Vessel Repair Entry: 85-385-574-5 Date of Arrival: July 4, 1983 Port of Arrival: Boston, Massachusetts Vessel: S.S. MORMACSKY

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 112714

                            June 28, 1993

VES-13-18-CO:R:IT:C  112714 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; Petition for Review; Modification; Inspections;
     Spare Parts;
     Vessel Repair Entry:  85-385-574-5
     Date of Arrival:  July 4, 1983
     Port of Arrival:  Boston, Massachusetts
     Vessel:  S.S. MORMACSKY


Dear Sir:

     This is in response to your communication with the Carrier
Rulings Branch which forwards the petition for relief from vessel
repair duties in connection with the above-referenced vessel for our
review.


FACTS:

     The S.S. MORMACSKY is owned and operated by the Moore McCormack
Marine Group (formerly known as Marine McCormack Bulk Transport,
Incorporated).  The items that are the subject of this petition stem
from various operations that were performed while the vessel was in
The Netherlands.  The following items have been submitted for our
review:

           1.   Satellite Communications System
           2.   Consumable Items/Items Purchased in the U.S.
           3.   Segregated Costs for Required Inspections
           4.   Improvements Foreign Labor Costs


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.


Satellite Communication System
(Invoice BT 219-105)

     The petitioner contends that duty with respect to this item
should be remitted because it is a modification since it is
permanently incorporated into the vessel.  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).

     To support its contention that the satellite communication
system is a permanent incorporation into the vessel, the petitioner
has submitted evidence in the form of letters from the satellite
communications system's vendor as well as a letter from Captain
William McManus, former Director of Marine Operations for the now
defunct U.S. Lines, Inc.  Both attest to the fact that this
communication system, once installed, becomes permanently affixed to
the vessel and is not, ordinarily, removed when the vessel is  

                                 -3-


placed in extended lay-up. Customs is satisfied that the petitioner
has met its burden of proving that this item is a modification. 
Accordingly, duty is remitted with respect to this item.


Consumable Items
(P.O. #T01362)
 
     The petitioner contends that the tank anodes constitute
consumable items and should be accorded duty-free treatment. 
Alternatively, the applicant suggests duty-free treatment is
appropriate for the tank anodes because they were purchased in the
U.S.  The tank anodes are installed in the vessel's ballast tanks
and are designed to release ions into the ballast water to slow the
process of corrosion.  According to the submitted documents, a
shipyard contractor installed the tank anodes (T01362) which are
designed to last from three and one-half to four years.

     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.  


                                 -4-


     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
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).

     A U.S. bill of sale has been submitted from the parts
manufacturer indicating that the parts are U.S. made.  Therefore,
the costs associated with this invoice pertaining to the spare parts
are not subject to duty to the extent that the invoice does not
contain a charge for the labor associated with the installation of
the anodes.  The cost of the foreign labor used to install the
anodes is dutiable.  

     
Segregation of Costs for Required Inspections
(Invoice BT 219-295)

     The petitioner contends that the duty on the cost of regulatory
required inspections should be remitted.  Accordingly, the
petitioner has presented U.S. Customs with a breakdown of the
various items identifying both inspection and repair costs as
follows.
                                 -5-


Amounts in DFL                  Total     Repairs    Survey

           Boiler Valves        11,820     8,000     3,820
           Hydro Test           30,430    26,000     4,430
           P/S Boilers          13,170     3,780     9,390
           DC Heater             5,700     2,860     2,840
           Cargo Gear            8,080     1,080     7,000
                                69,200    41,720     27,480
@2.8444 Rate=                  $24,328   $14,667     $9,661

     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),
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
                                 -6-


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.
 
     Following the rule set forth above, the Customs Service finds
that the surveys with respect to the Boiler Valves, Hydro Test, P/S
Boilers, and DC Heater were required scheduled surveys and,
therefore, not dutiable.  It is clear on the face of these invoices
that the surveys were for regulatory inspection and the petitioner
has provided adequate proof of the survey costs.  The separately
itemized repair costs remain dutiable.

     The last item's (Cargo Gear) segregated survey cost is not
substantiated in the accompanying documentation.  Accordingly, the
entire amount of this invoice remains dutiable.  While segregated
nondutiable items may be remitted if separately itemized, the
subject invoice and related documentation offered no evidence of a
sufficiently established segregated cost for a scheduled required
survey.  Absent this requisite documentation, this item is dutiable.


Improvements Foreign Labor Costs
(BT219-296 B,C, & D)

     The petitioner maintains that the duty associated with the
installations of the fuel oil service heater, the cargo stripping
system, and the satellite communications system should be remitted
because they are each a part of a modification.  Customs ruled at
the application stage that duty with respect to these items may be
remitted if it could be established that these operations were 
permanently attached to the vessel and essential to the vessel's
successful operation.  See Otte v. United States, 7 C.C.P.A. 166
(1916).  

     To determine whether a particular operation is a modification
as opposed to a repair, the appropriate inquiry is to analyze the 
                                 -7-


condition of the structures 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 structures which are in need
of repair at that time.  If a permanent addition is a first-time
installation, or if it replaces an existing structure which 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 bona fide duty-free modification.  Headquarters Ruling 111224
(Feb. 19, 1991).

     The Customs Service is satisfied that the fuel oil service
heater and the satellite communications system installations are a
part of a modification.  The evidence submitted establishes that
these items are permanent first-time installations and not
replacements for an existing structure in need of repair. 
Accordingly, duty with respect to these items is remitted.
The Customs Service is, also, satisfied that the petitioner has
demonstrated that duty on the cargo stripping system installation
should be remitted.  The evidence submitted (statement of port
engineer, dated Mar. 14, 1989) establishes that the cargo stripping
system modification was implemented to enhance the vessel's
efficiency and was not a replacement of an item in need of repair.  


HOLDING:

     After a thorough review of the submitted evidence, this
petition for relief is granted, in part, and denied, in part, for
the reasons detailed in the Law and Analysis  section of this
ruling.  The petitioner should be informed of the right to file a
Protest following liquidation of this entry, as evidenced by the
posting of the bulletin notice of liquidation.

                                Sincerely,




                                Stuart P. Seidel
                                Director, International Trade
                                Compliance Division