Protest No. 2002-07-101444; Vessel Repair Entry No. C20-0056714-2; MAHIMAHI; Modification; 19 U.S.C. § 1466

HQ H016492 October 17, 2007 VES-13-18-OT:RR:BSTC:CCI H016492 JLB CATEGORY: Carriers Supervisory Import Specialist Vessel Repair Unit U.S. Customs and Border Protection 1515 Poydras Street, Suite 1700 New Orleans, LA 70112 RE: Protest No. 2002-07-101444; Vessel Repair Entry No. C20-0056714-2; MAHIMAHI; Modification; 19 U.S.C. § 1466 Dear Sir: This letter is in response to your memorandum of August 22, 2007, which forwarded the above-captioned protest to the assessment of vessel repair duties for our review. FACTS On February 23, 2005, while in China, the vessel M/V MAHIMAHI underwent various shipyard operations. The vessel arrived in Los Angeles, California on April 11, 2005. The application for relief from duties filed in conjunction with this entry was not considered because it did not meet the established minimum standards. Pursuant to your office’s letter of March 30, 2007, duties in the amount of $543,836.53 were assessed. A protest was timely filed. Duties in the amount of approximately $150,000 are the subject of this protest. The protestant claims that the installation of the high pressure air compressor in the vessel’s starting air system (covered by Exhibit 1, item 1013 and Exhibit 65) is a non-dutiable modification under 19 U.S.C. § 1466. ISSUE Whether the work performed on the vessel while in a foreign shipyard constitutes a modification to the vessel and therefore is not dutiable under 19 U.S.C. § 1466? LAW AND ANALYSIS Pursuant to 19 U.S.C. § 1466(a), there must be a 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 engage in such trades. U.S. Customs and Border Protection (“CBP”) has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. In determining whether an operation has resulted in a non-dutiable modification, the following factors have been considered: 1. Whether there is a permanent incorporation into the hull or superstructure of a vessel. 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. Frequently, when considering whether there is an addition to the hull and fittings within 19 U.S.C. § 1466, we have to consider the question of whether the work involved the purchase of "equipment" for the vessel. A leading case in the interpretation and application of § 1466 is United States v. Admiral Oriental Line et al., 18 C.C.P.A. 137 (T.D. 44359 (1930)). That case distinguished between equipment and repairs on one hand and permanent additions to the hull and fittings on the other. “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.” See Admiral Oriental, supra., quoting T.D. 34150 (1914). The court attempted to distinguish non-dutiable items which are part of the hull and fittings of a vessel from dutiable equipment, as defined above. Non-dutiable items might 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.” See Admiral Oriental, supra., quoting 27 Op. Atty. Gen. 228. The permanent incorporation factor 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. See Headquarters Decision 112525, dated April 15 1993; Headquarters Decision 112945, dated May 31, 1994; see also Headquarters Decision 112378, dated November 30, 1992. CBP has held that our review of documentation submitted to determine whether an installation constitutes a permanent incorporation into the hull and fittings of the vessel depends to a great extent on the detail and accuracy of the drawings and invoice descriptions of the actual work performed. See Headquarters Decision 111554, dated October 11, 1991. In this case, as part of the installation of the new compressor, a new foundation was created to accept the compressor skid. See Protest at 3. However, the only information provided by the protestant in this case is that the compressor and motor were “mounted on a common skid with internal water cooled intercoolers.” See Protest at 3. Since the air compressor was merely mounted in place, as would be any other piece of equipment which must be secured from potential shifting and movement aboard a vessel, it is not permanently incorporated. To determine whether a particular replacement is a modification as opposed to a repair, the appropriate inquiry is to analyze the condition of the structure prior to being replaced. See Headquarters Decision 112926, dated November 29, 1993. CBP has held that the removal of an existing operational system to improve the efficient performance of the vessel is not dutiable if the work was not performed in conjunction with dutiable repairs. See Headquarters Decision 109971, dated June 12, 1989. If a permanent addition is a first-time installation, or if it replaces an existing structure that 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 duty-free modification. See Headquarters Decision 111224, dated Feb. 19, 1991. If the work done involves an element of repair due to damages, deterioration or wear and tear then it is a dutiable repair. See Headquarters Decision 110569, dated April 12, 1990. The protestant asserts that the air compressor was fully operational at the time it was replaced and that the replacement was for a more efficient system with improved design features. However, the high pressure air compressor that was replaced had reduced its maximum operating pressure; dropping from 30 to 23 Bar in the last several years. When there was no need for high pressure air, the operating pressure was reduced even further “in an effort to improve the reliability of the compressors.” See Protest at 2. This demonstrates that the compressor was replaced due to wear and tear and deterioration. Accordingly, we find that the installation of the compressor constitutes a dutiable repair. The United States Court of Appeals for the Federal Circuit has ruled that expenses that would not have been incurred "but for" the dutiable repair work done are themselves dutiable, and, conversely, expenses that would not have been incurred but for the non-dutiable work done are themselves non-dutiable. Texaco Marine Services, Inc. v. United States, 44 F.3d 1539 (Fed. Cir. 1994), aff'g 815 F.Supp. 1484 (Ct. Int'l Trade 1993). Therefore, we find that Exhibit 1, item 1013 is dutiable (as is Exhibit 65) since the installation cost would not have needed to be performed but for the installation of the air compressor. HOLDING After a thorough review of the record, the protest should be denied as detailed above. In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the 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 make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Glen E. Vereb, Chief Cargo Security, Carriers and Immigration Branch