Vessel Repair Entry No. C20-0037405-1; M/V MARINE PRINCESS V-48; Repairs; Inspections; U.S. Parts; Drydocking charges

HQ 112245 July 22, 1992 VES-13-18-CO:R:IT:C 112245 GEV CATEGORY: Carriers Deputy Assistant Regional Commissioner Commercial Operations Division 423 Canal Street New Orleans, Louisiana 70130-2341 RE: Vessel Repair Entry No. C20-0037405-1; M/V MARINE PRINCESS V-48; Repairs; Inspections; U.S. Parts; Drydocking charges Dear Sir: This is in response to your memorandum dated May 7, 1992, forwarding an application for relief from duties assessed pursuant to 19 U.S.C. 1466. Our findings are set forth below. FACTS: The M/V MARINE PRINCESS is a U.S.-flag vessel operated by Marine Transport Lines, Inc. of Secaucus, New Jersey. The subject vessel had foreign shipyard work performed at Sembawang Shipyard in Singapore during the period of October 28 - December 12, 1991. Subsequent to the completion of the work the vessel arrived in the United States at New Orleans, Louisiana on January 20, 1992. A vessel repair entry covering the work in question was filed on January 21, 1992. Pursuant to an authorized extension of time, an application for relief, dated April 10, 1992, was timely filed. Relief is requested on the basis that various costs, including drydocking charges, do not constitute dutiable repairs and/or are otherwise nondutiable under the vessel repair statute (19 U.S.C. 1466). The applicant also claims relief for U.S. parts and materials. In support of these claims the applicant has submitted work sheets, invoices, drydock specifications, and documentation from the American Bureau of Shipping (ABS). ISSUES: 1. Whether certain expenses incurred during the course of repairs to the subject vessel when it was drydocked in a foreign shipyard are dutiable pursuant to 19 U.S.C. 1466. - 2 - 2. Whether evidence is presented sufficient to prove that vessel parts and/or materials were purchased in the United States and shipped foreign for installation aboard a U.S.-flag vessel thereby exempting them from duty pursuant to 19 U.S.C. 1466(h). 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 trades. 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 labor cost 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. In regard to the documentation contained in the application, we note that although U.S. invoices covering parts and materials have been submitted, the requisite certifications are not contained in the record. Absent these certifications, or proof that any of the parts and materials were manufactured in the United States, relief pursuant to section 1466(h) is denied. In regard to the dutiability of various drydocking expenses, we note that Customs has long-held such costs (e.g., staging, telephone, shore power, etc.), to be nondutiable. Upon reviewing the record in its entirety, we note that we are in accord with the applicant's claims for relief regarding the aforementioned expenses (as delineated on the application) as well as the remaining costs for which relief is requested, with the exception of those items discussed below. Several items listed on the invoices cover costs relating to surveys, inspection and testing either before, during or after repair work. In regard to the dutiability of these costs, we note that 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, 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 (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 ABS. 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 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 American Bureau of Shipping). 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. Turning to the case before us, we note that the ABS surveys for which relief is requested are dutiable with the exception of the annual hull, machinery and load line surveys. In addition, the inspection-related costs in the following items are dutiable: D1, D2, D7, E1, E2, E3, E4, E5, E8, E9, E14, E16, E17, E21, E22, E23, E24, E25, and 14-10. Furthermore, the cost of ultrasonic gauging listed in Shin-Toyo Engineering Private Limited invoice no. STI/1935/91, dated November 30, 1991 (and set forth in the section of the application marked "MISC INVOICES") is also dutiable under the rationale discussed above. HOLDINGS: 1. Certain expenses incurred during the course of repairs to the subject vessel when it was drydocked in a foreign shipyard are not within the purview of 19 U.S.C. 1466 as noted above. 2. Vessel parts and materials purchased in the United States and shipped foreign for installation aboard a U.S.-flag vessel are exempted from duty pursuant to 19 U.S.C. 1466(h), provided the requisite evidentiary documentation is submitted. Accordingly, with respect to the application under consideration, relief should be granted for those parts and materials covered by U.S. invoices if the required certifications are submitted, or proof is submitted that the parts and materials were manufactured in the United States. Sincerely, B. James Fritz Chief Carrier Rulings Branch