19 U.S.C. § 1466; Modification

HQ W116658 July 7, 2006 VES-3-RR:BSTC:CCI 116658 CK CATEGORY: Carriers Sharon Steele Doyle Givens and Johnson, PLLC 950 Echo Lane, Suite 360 Houston, TX 77024 RE: 19 U.S.C. § 1466; Modification Dear Ms. Doyle: This letter is in reply to your request for an advisory ruling dated May 16, 2006 on behalf of your client, Matson Navigation Company. Our reply follows. FACTS: Matson Navigation Company, Inc. (“Matson”) intends to perform certain work on the MV MAHIMAHI, MV MANOA, and MV MOKIHANA (“the vessels”), by replacing each vessel’s electrical generating system with a newly designed, fuel efficient generator set with an integrated Selective Catalytic Reduction (SCR) device for emissions reductions. The ships’ service diesel generators provide the entire electrical load for ship operation as well as electrical power to the reefer containers on your vessels. The ship service electrical load is in the order of 1400kW. Depending on the reefer load, the electrical power requirement increases an additional 1000-1500kW. Each vessel is equipped with three ship’s service diesel generators rated at 2500kW and one ship service turbo generator (SSTG) rated at 1500kW. During sea operations, the turbo generator and one of the diesel generators are operational. Control systems are in place to maximize the electrical power extraction from the turbo generator. The additional power requirement is handled by the diesel generator in service. The current diesel generators present operational challenges. Previous modifications to the generators to use a light grade of residual heavy fuel were only moderately successful. Thus, these ships cannot use the same type of fuel oil for both the main engine and diesel generators, as do modern vessels. A second challenge is that the grade of fuel for these ships is no longer the standard and is not readily available on the US west coast. You state the newly designed generators if installed would have a multitude of advantages, including a fuel efficiency 15% greater than the existing generators. You envision the new generator will be the primary provider of electrical load for the remaining life of the vessel, while the remaining two generators will provide stand-by-power generation capability. Additionally, new international regulations on limits for diesel engine emissions are in place and effective for all new ships as of May 2005. The new diesel generators would meet the established international emission standards for Nox (oxides of Nitrogen pollution). You state that the new SCR (Selective Catalytic Reduction) system is widely used in thermal power plants and ocean going vessels calling in the Baltic areas and is a proven technology to reduce the Nox by more than 90%. The proposed modifications would require the following: Remove existing SSDG No. 1 Remove electrical piping connections and some attached parts Cut and remove the ship structure above the SSDG for crane access Disconnect the bolted foundation Rig up and lift the SSDG up and out suing a floating crane Remove the old foundation skid members Disconnect and remove the old exhaust silencer Install new SSDG No. 1 including SCR (Selective Catalytic Reduction) Components Install new foundation beams, provide and install machined shims Provide new exhaust connection for SCR silencer Rig in new SCR silencer and connect to existing exhaust piping Rig up, lift and lower the new SSDG into place using a floating crane Bolt up new conical vibration isolators with new machined shims Replace the ship structure above the SSDG, test for tightness Connect main electrical power cables and control wiring Connect support systems including fuel, cooling water, exhaust, lube oil, control air Install new fresh water expansion tank Install the service tank for SCR urea solution Install other SCR auxiliary components including urea injector, control unit, service, pump, static mixers, flow dressers, dust blower and instrumentation Perform function testing, load testing and emissions measurements ISSUE: Whether the proposed work to the vessels, as described above, constitutes a non-dutiable modification under 19 U.S.C. § 1466. LAW AND ANALYSIS: Title 19, United States Code, § 1466(a) (19 U.S.C. 1466(a)), 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…” In its application of the vessel repair statute, 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. The identification of work constituting modifications vis-à-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 that 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 that is non-dutiable under section 1466. A claim for duty-free modification must address four areas: whether there was a permanent incorporation into the hull or fittings; whether the item would remain aboard during an extended lay-up; if not a first-time installation, whether an item that was not in good working order was replaced; and whether the item provided an improvement in operation or efficiency. In this case, the proposed generator set with an integrated Selective Catalytic Reduction (SCR) would be permanently installed. You state the current diesel generator is in good working order and the new generating set is not in response to a repair. You also state that the new generating set would greatly improve the efficiency of your electrical system and operation of the vessel. Upon our review of the information you submitted, it appears that the proposed work constitutes a modification to the subject vessels, and is, therefore, non-dutiable under 19 U.S.C. § 1466. We emphasize, however, that this ruling is merely advisory in nature and neither eliminates the requirement to declare all work done abroad at the subject vessel’s first United States port of arrival, nor the requirement of filing the declaration/entry showing this work (see §§ 4.14(d) and (e), CBP Regulations (19 CFR §§ 4.14(d) and (e)). Furthermore, any final decision on this matter is contingent on CBP’s review of the evidence submitted pursuant to section 4.14(i), CBP Regulations (19 CFR 4.14(i)). HOLDING: The proposed work to the vessels, as described above, constitutes a non-dutiable modification under 19 U.S.C. § 1466, pending further review of the evidence by CBP, as discussed above. Sincerely, Glen E. Vereb Chief Cargo Security, Carriers and Immigration Branch