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HQ 114334

September 23, 1998

VES-13-18-RR:IT:EC 114334 GEV


Chief, Liquidation Branch
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94126

RE: Vessel Repair Entry No. 110-6461890-0; PRESIDENT POLK; V-80; 19 U.S.C. ? 1466;
General Services; Proration; Modifications; Prefabricated Steel; Materials

Dear Sir:

This is in response to your memorandum dated April 1, 1998, forwarding a petition for review of our decision on an application for relief. You request our review of the petitioner's claims. Our findings are set forth below.


The PRESIDENT POLK is a U.S.-flag vessel owned and operated by American President Lines, Ltd. Subsequent to the completion of various foreign shipyard work, the vessel arrived at Seattle, Washington, on May 9, 1996. A vessel repair entry was timely filed.

An application for relief with supporting documentation was timely filed. The applicant sought relief with respect to numerous items listed within the above-referenced vessel repair entry. By letter dated February 11, 1998, your office denied the application in part and granted it in part based on Headquarters ruling letter 114047, dated January 27, 1998, and informed the applicant of the right to file a petition of this decision pursuant to ? 4.14(d)(2) of the Customs Regulations (19 CFR ? 4.14(d)(2)). Subsequently, a petition was timely filed seeking relief for the following: CF 226 Item No. 2-General Services-Proration; Item 117 (Drydocking costs); Item 501 (Corrugated Bulkhead FR 271 Modification); Item 502 (No. 3 - Cargo Hold Structural Modification); Item 503 (Slim-Guide Bracket Modification); C.O. No. 1 - Bow Thruster Service Engineer; C.O. No. 2 - No. 1 Deep Tank Modification; CF 226 Item No. 3 - Paint; CF 226 Item No. 16 - PMC Invoice No. 95-2900-8A.


Whether the costs for which the petitioner seeks relief are dutiable under 19 U.S.C.


Title 19, United States Code, ? 1466, provides in pertinent part for the payment of an ad valorem duty of 50 percent of the cost of "...equipments, or any part thereof, including boats, purchased for, or the repair parts or materials to be used, or the expenses of repairs made in a foreign country upon a vessel documented under the laws of the United States..."

With respect to the General Services and Drydocking costs (Item No. 117) under consideration, we note that at both the application and petition stages the evidence submitted was insufficient to support the claim that such costs were attributed solely to non-dutiable work. Furthermore, since the subject entry contained both dutiable and non-dutiable costs, the General Services and Drydocking costs at issue were prorated pursuant to Customs ruling letter 113474 and memorandum 113350 both of which addressed Customs implementation of the decision of the U.S. Court of Appeals for the Federal Circuit in Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (CAFC 1994).

Notwithstanding the petitioner's assertions to the contrary, we maintain that the General Services and Drydocking costs in question were correctly prorated in accordance with the above-cited authority in view of the absence of evidence substantiating a finding that these costs were attributed solely to nondutiable work.

Item Nos. 501, 502 and 503 are all alleged to be nondutiable modifications to correct an original design defect on all 5 of the C-10 class vessels. With respect to the petitioner's allegations, we note the following.

In its application of the vessel repair statute, Customs has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. The identification of work constituting modifications vis-a-vis work constituting repairs has evolved from judicial and administrative precedent. (See Otte v. United States, 7 Ct. Cust. Appls. 166, T.D. 36489 (1916); United States v. Admiral Oriental Line et al., 18 C.C.P.A. 137, T.D. 44359 (1930); and Customs Bulletin and Decisions, Vol. 31, Number 40, published October 1, 1997.) The factors discussed within the aforementioned authority are not by themselves necessarily determinative, nor are they the only factors which may be relevant in a given case. However, in a given case, these factors may be illustrative, illuminating, or relevant with respect to the issue of whether certain work may be a modification of a vessel which is nondutiable under 19 U.S.C. ? 1466.

Upon further review of the record, it is evident that Item Nos. 501 and 502 cover work performed prior to the existence of any repairs due to bulkhead cracking or structural failure the petitioner states would have been necessitated had this work not been done. It is Customs position that work performed on a vessel to correct an original design deficiency which is in accord with the above-referenced criteria for a modification is nondutiable so long as it is done prior to the existence of any defect or wastage in the present installation, or repair costs incurred as a result of such defect or wastage are segregated from the modification costs. (Headquarters ruling letters 111884, dated March 25, 1992; 112795, dated January 5, 1994; and 226485, dated February 5, 1996) Item Nos. 501 and 502 meet the aforementioned standards for nondutiable modifications and therefore are accorded such treatment.

With respect to Item No. 503, however, we note that the shipyard invoice states, "The existing brackets connecting the stantion to the container slim-guide' fractured." (emphasis added) Furthermore, the petitioner readily admits that, "Yes, the failure did mandate corrective action;..." Consequently, since there is evidence of prior wastage, the work done under this item does not meet the requisite criteria for a modification as discussed above. The petitioner states that the work done under this item "...involves the addition of new previously non-existing permanently installed steel by welding." Pursuant to the above-cited authority, the repair of this fracture by installing a new design bracket does not remove the work in question from consideration as a dutiable repair rather than a modification. Item No. 503 is therefore dutiable.

CF Item No. 16 covers the supervision services of an individual alleged to be performed in conjunction with the non-dutiable modifications referenced in Item Nos. 501 and 502. We note, however, that the invoice covering these services (PMC Invoice No. 95-2900-8A), merely consists of the following statement: "Services performed by KARL MASANNECK from 1 April 1996 through 30 April 1996 in conjunction with the M/V PRESIDENT POLK as follows:" The invoice then lists a breakdown of costs per day, travel expenses, and a PMC fee. Nothing on the invoice provides any nexus between the services of this individual and Item Nos. 501 and 502. Based on the insufficiency of this evidence, we find CF Item No. 16 to be dutiable.

C.O. No. 1 Bow Thruster Service Engineer covers the cost of the technical services of an engineer "...to attend the MV President Polk item #302 and 303." The petitioner contends that these engineer services are incident to nondutiable regulatory required inspections of the bow thruster, and that Items 302 (held to be nondutiable by Customs at the application stage) and 303 (deemed dutiable at the application stage) are nondutiable as well. In support of this claim the petitioner relies on ABS Rules for Building and Classing Steel Vessels (1995), 1/3.2 Drydocking Surveys, subsection 1/3.2.1(c) and Enclosure D to the petition (a statement by the engineer who performed the services, as well as one by the APL port engineer, that no repairs were performed to the bow thruster during the course of these services, only regulatory required inspections). Upon further review of this matter, we are in accord with the petitioner. The services of the engineer under consideration are therefore nondutiable, as are Item Nos. 302 and 303.

The cost for the shipyard invoice item entitled, "C.O. #2 No. 1 Deep Tank Modification" is alleged to be nondutiable either as a modification and/or pursuant to 19 U.S.C. ? 1466(h)(3). In support of the former claim, the petitioner states that: (1) This item is entitled "No. 1 Deep Tank Modification"; (2) Hyundai material list (Enc. D) is entitled "Modification" Internal Member(s) at Swah Blid in No. 1 Deep tank."' and (3) All of the previously non-existent steel shown on Enc. C is new steel permanently installed by welding and constitutes a modification to an existing structure to correct a C-10 class vessel initial design defect.

With respect to the above-listed claims we note as follows. Although this work item is entitled "No. 1 Deep Tank Modification", the work description appearing under the title characterizes the work as "repairs" four different times. Furthermore, the Hyundai material list (Enc. D) actually contains the following work description, "Modificated [sic] Internal member in way of #1 Deep E as follows..." The document then merely lists various articles, tests and staging costs without providing any clarification with respect to the work involved. As for Enc. C, the drawings thereon contain no delineation with respect to the alleged previously non-existent steel and do not corroborate the petitioner's statement. Consequently, the evidence submitted is insufficient to substantiate the petitioner's claim that this work constitutes a nondutiable modification.

In regard to the petitioner's claim for relief pursuant to 19 U.S.C. ? 1466(h)(3), that statutory provision provides as follows:

The duty imposed by section (a) of this section shall not apply to-
(3) the cost of spare parts necessarily installed before the first entry into the United States, but only if duty is paid under appropriate commodity classifications of the Harmonized Tariff Schedules 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)

For the purpose of 19 U.S.C. ? 1466(h), we have defined a "part" as follows:

A part is determined to be something which does not lose its essential character or its identity as a distinct entity but which, like materials, is incorporated into a larger whole. It would be possible to disassemble an apparatus and still be able to identify a part. The term part does not mean part of a vessel, which practically speaking would encompass all elements necessary for a vessel to operate in its designated trade.
Examples of parts as defined are seen in such items as piston rings and pre-formed gaskets, as opposed to gaskets which are cut at the work site from gasket material.

The record remains unclear as to what "spare parts" the petitioner seeks relief for pursuant to 19 U.S.C. ? 1466(h)(3). Furthermore, the petitioner has not established that the prefabricated steel is a part under 19 U.S.C. ? 1466(h)(3). Therefore, this steel is dutiable under 19 U.S.C.

Our determination and analysis is the same here as in Rulings 113883, dated April 1, 1997, and 113673, dated July 7, 1997.

CF 226 Item No. 3 covers paint listed on the following three IPC invoices: (1) Invoice no. 044283; (2) Invoice No. 036974; and (3) 046136. With respect to the latter, the petitioner readily concedes that the paint listed thereon is dutiable under the vessel repair statute.

In regard to IP Invoice no. 044283, the petitioner states that "[s]ince this material was necessarily installed' by the vessel crew, it should be exempt from duty under 19 USC 1466 (A) and qualifies for GATT duty under 19 USC 1466 (h) (2)." (Emphasis added) This statement is contradictory since the words "necessarily installed" are set forth in ? 1466(h)(3), discussed above, not ? 1466(h)(2) cited by the petitioner. Further in this regard, it should be noted that parts, not materials such as paint. Relief is available for paint under ? 1466(h)(2), provided the requisite criteria are met. That statutory provision is set forth below:

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 clas- sifications 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, or

19 U.S.C. ? 1466(h)(2) contemplates entry of the pertinent part or material, and the payment of duty under the appropriate commodity classification of the HTSUS, prior to the use of the pertinent part or material in the foreign shipyard. That is not what occurred with respect to the paint listed on IPC invoice no. 044283 which was purchased in Korea and shipped to the subject vessel in that country where it was used. Consequently, the paint listed on this invoice is dutiable.

In regard to IPC invoice 036974, we note that while ? 1466(h)(2) applies by its terms only to foreign-made imported parts or materials, there was ample reason to extend its effect to U.S.-made parts or materials as well. To fail to do so would act to discourage the use of U.S.-made parts or materials in effecting foreign repairs since continued linkage of remission provisions of subsection 1466(d)(2) with the assessment provisions of subsection (a) of ? 1466 would obligate operators to pay duty on such materials unless they were installed by crew or resident labor. Consequently, Customs so extended the duty-free treatment of subsection (h) to U.S.-manufactured parts or materials (See, e.g., Customs ruling letter 110980, dated April 16, 1991) In this regard, we note that the petitioner has submitted a statement from the U.S. manufacturer of the paint listed on IPC invoice no. 036974 that it was manufactured in the United States. Accordingly, the petitioner's claim for relief for the paint covered by this invoice is granted.


As detailed above, the petition is granted in part and denied in part.


Jerry Laderberg
Entry Procedures and Carriers

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