Protest No. 2002-08-100223; Vessel Repair Entry No. NF4-4351222-5; M/V RESOLVE; 19 U.S.C. § 1466; Modification; 19 U.S.C. § 1466(h)(2)

HQ H044995 February 4, 2009 VES-13-18-OT:RR:BSTC:CCI H044995 JLB CATEGORY: Carriers Supervisory Import Specialist Vessel Repair Unit U.S. Customs and Border Protection 1515 Poydras Street, Suite 1700 New Orleans, Louisiana 70112 RE: Protest No. 2002-08-100223; Vessel Repair Entry No. NF4-4351222-5; M/V RESOLVE; 19 U.S.C. § 1466; Modification; 19 U.S.C. § 1466(h)(2) Dear Sir: This is in response to your memorandum of November 10, 2008, forwarding the above-referenced application for further review. We have reviewed the arguments set forth by your office and by counsel on behalf of the protestant, Interocean American Shipping Corporation. Our decision follows. FACTS The subject protest involves shipyard work undergone by the M/V RESOLVE. The vessel is currently owned by Fidelio Limited Partnership and operated by Interocean American Shipping Corporation (“Interocean”). On November 9, 2007, the vessel arrived at the Asry Shipyard in Asry, Bahrain for various shipyard work and returned to the United States at the port of Houston, Texas on December 22, 2007. A vessel repair entry was timely filed. On April 24, 2008, Interocean filed an application for relief of the vessel repair duties assessed on the costs covered in the subject vessel entry. In response thereto, your office issued a decision on May 16, 2008, which denied in part, and granted in part, the application for relief. Accordingly, your office assessed vessel repair duties in the amount of $242,764.20. A timely protest was filed thereto for the duties assessed for numerous items. ISSUE Whether the costs for which the protestant seeks relief are subject to duty 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. Title 19, United States Code, Section 1466(h)(2) (19 U.S.C. § 1466(h)(2)), provides, in pertinent part, that the duty imposed by subsection (a) shall not apply to "…the cost of spare repair parts or materials (other than nets or netting) 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…" It is the position of U.S. Customs and Border Protection (“CBP”) that this section also exempts from duty repair parts or materials that have been manufactured in the United States, in addition to those which have entered the United States duty-paid, and are used aboard a cargo vessel engaged in foreign or coastwise trade. See Headquarters Ruling Letter 115561, dated April 8, 2002; Headquarters Ruling Letter 116061, dated November 17, 2003. Tab 8: Seacoast Electronics Inc. -- S-VDR System and microphones The invoice for the work performed states “provide and install Furuno S-VDR System.” See Seacoast Electronics Inc. Voucher. The item in question is stated to be a voyage data recorder, allegedly similar to the “black box” used by an aircraft, installed with the same purpose of improving safety by determining the cause of any incidents or casualties that occur on the vessel. The protestant provides that the installation involves installing electronic sensors in various parts of the vessel including several microphones for the bridge audio and radio communications, GPS data for the date time and position, main alarms, rudder order, etc. This is stated to require running wires to and installing sensors to record the status of machinery onboard, interfacing and recording this data as well as providing emergency battery backup for the system. The protestant asserts two independent arguments as to why the S-VDR System is non-dutiable. First, the protestant contends that since the S-VDR equipment was sold to Interocean by an unaffiliated U.S. vendor, Seacoast Electronics, who imported the equipment duty-free into the United States, it is non-dutiable. See Protest at 2. The protestant asserts that the dutiability of this item should be based on whether the U.S. invoice and other documentation constitute sufficient evidence that the product was entered in the U.S. duty-paid. See Protest at 2. However, it is important to note that 19 U.S.C. § 1466(h)(2) only applies to “the cost of…parts or materials,” thus, it is necessary initially that the key terms be defined. For purposes of 19 U.S.C. § 1466 the term “materials” is determined to mean something which is consumed in the course of its use, and/or loses its identity as a distinct entity incorporated into the larger whole. Some examples of materials as defined are seen in such items as a container of paint which is applied to vessel surfaces, and sheets of steel which are incorporated into the hull and superstructure of a vessel.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 readily 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. See Headquarters Ruling Letter 116061, dated November 17, 2003.The term “equipment” is determined to mean something which constitutes an operating entity unto itself. “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 United States v. Admiral Oriental Line et al., 18 C.C.P.A. 137 (quoting T.D. 34150, (1914)). It is the Vessel Repair Unit (“the VRU”)’s position that the system constitutes “equipment” and should be held dutiable. As noted above, it is CBP’s position that 19 U.S.C. § 1466(h)(2) only contemplates eligible parts or materials. Equipment is not entitled to relief from duties under 19 U.S.C. § 1466(h)(2). See Headquarters Ruling Letter 116061, dated November 17, 2003. The burden rests on the protestant to establish, by adequate, clear, and satisfactory documentary evidence, that an item is non-dutiable under 19 U.S.C. § 1466. See Headquarters Ruling Letter 116462, dated May 16, 2005. The protestant has not met its burden of proof in demonstrating that the S-VDR system is non-dutiable equipment especially given the repeated references to the term ‘equipment’ on the submitted invoice and accompanying documentation. Accordingly, the S-VDR does not qualify as a non-dutiable item under 19 U.S.C. § 1466(h)(2). The second argument asserted by the protestant is that the installation of the S-VDR System is a modification. In its application of the vessel repair statute, CBP has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. The factors considered in identifying work constituting modifications, vis-à-vis work constituting repairs, have evolved from judicial and administrative precedent. See Otte v. United States, 7 Ct. Cust. Appls. 166, Treasury Decision (T.D.) 36489 (1916); United States v. Admiral Oriental Line et al., 18 C.C.P.A. 137, Treasury Decision (T.D.) 44359 (1930); see also Cust. Bull. and Dec., Vol. 31, No. 40 (Oct. 1, 1997). These factors include: 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. These factors 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 non-dutiable under 19 U.S.C. § 1466. The protestant claims that the S-VDR installation is a permanent incorporation into the hull or superstructure of the vessel that “is required by Annexes 26 and 27 to the International Convention for the Safety of Life at Sea” for all cargo ships and that “it also provides an improvement or enhancement in operation or efficiency of the vessel, for it is a required installation.” See Protest at 3. It is important to note, however, that even if the installation of the voyage data recorder was such a requirement, this alone is not dispositive of a modification claim. In fact, CBP’s position has been consistently set forth as follows: It should be noted that the fact that a change or addition of equipment is made to conform with a new design scheme, or for the purpose of complying with the requirements of statute or code, is not a relevant consideration. Therefore, any change accomplished solely for these reasons, and which does not constitute a permanent addition to the hull and fittings to the vessel, would be dutiable under section 1466. See, e.g., Headquarters Ruling Letter 114092, dated September 12, 1997; Headquarters Ruling Letters 111230, dated November 8, 1990; Headquarters Ruling Letter 111272, dated November 2, 1990. The VRU asserts that the protestant did not present clear evidence that this installation is a non-dutiable modification. Our review of the documentation submitted to determine whether a modification exists depends to a great extent on the detail and accuracy of the drawings and invoice descriptions of the actual work performed. See Headquarters Ruling Letter 111554, dated October 11, 1991; Headquarters Ruling Letter 113233, dated February 23, 1996. In this case, other than counsel’s assertions, a detailed description of the work performed was not provided to illustrate that the installation of the S-VDR System was a modification. The documentation was therefore insufficient to support such a claim. Accordingly, this item is held dutiable. Tab 21: Parts for diesel generator In the application for relief, the protestant claimed that 49 items were non-dutiable based on their classifications under the Harmonized Tariff Schedule of the United States (“HTSUS”). While the invoice listed 49 items that the protestant asserted were non-dutiable, there were no notations of the relevant tariff classifications given. The CBP Form 7501 submitted with the application for relief listed different tariff classifications with ad valorem and free duty rates, but there were only 22 such tariff classifications provided. Given that the VRU was unable to verify the proper duty classifications under the HTSUS, this item was held dutiable. In the protest, the protestant merely states “a new 7501 is attached at Tab H to this letter, as requested by CBP.” See Protest at 4. The protestant’s newly submitted CBP Form 7501 only contains one tariff classification and one duty rate. See CBP Form 7501. No explanation is offered as to why the originally submitted CBP Form 7501 contained 22 tariff classifications and several different descriptions of the merchandise yet the newly submitted form contains only one tariff classification with the description “engine parts.” See CBP Form 7501. Additionally, a new invoice was not provided and while the total quantity of units on the newly submitted CBP Form 7501 agrees with the amount on the originally submitted invoice, the invoice description is lacking sufficient detail. Due to these discrepancies and the insufficient documentation provided, these items are held dutiable. HOLDING After a thorough review of the record, the protest is denied as detailed above. In accordance with the Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 26 and 29), 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