Protest No. 0401-91-100832; Boston Vessel Repair Entry No. 559-1237226-9, dated April 25, 1991; M/V NEDLLOYD HUDSON; Voyage 35; Modification; Air Compressor; Advisory Ruling; 19 U.S.C. 1466

HQ 112525 April 15 1993 VES-13-18-CO:R:IT:C 112525 BEW CATEGORY: Carriers Chief, Residual Liquidation Protest Branch New York Region 6 World Trade Center New York, New York 10048-002980 RE: Protest No. 0401-91-100832; Boston Vessel Repair Entry No. 559-1237226-9, dated April 25, 1991; M/V NEDLLOYD HUDSON; Voyage 35; Modification; Air Compressor; Advisory Ruling; 19 U.S.C. 1466 Dear Sir: This is in response to a memorandum dated November 10, 1992, that forwards protest No. 0401-91-100832, concerning vessel repair entry No. 559-1237226-9, relating to the M/V NEDLLOYD HUDSON, Voyage 35. FACTS: The record reflects that the subject vessel, the NEDLLOYD HUDSON, arrived at the port of Boston, Massachusetts, on April 24, 1991. Vessel repair entry, number 559-1237226-9, was filed on April 24, 1991. The entry indicates that the vessel, among other items, had a complete compressed air system installed while the vessel was in Rotterdam, Holland. An application for relief was filed on June 24, 1991. This application was denied in part by your office, for no documentation was included with the application to establish the claim that the installation of the air compressor is not subject to duty as a modification. The entry was liquidated on October 4, 1991. Sea-Land filed a protest on December 30, 1991, claiming that the service to the air compressor was under warranty and of no cost to Sea-Land. It claims that Item No. 5 - W.B. Arnold Co., Inc. invoice Nos. 201017 and 20196 for the installation of a 2TM6 Compressor and upgrading of the existing compressor were submitted for information only. The protestant references an advisory ruling in which this office stated that given the information submitted, the prospective work would be considered a modification that is not subject to duty. Headquarters Ruling Letter 110993, dated May 2, 1990. ISSUE: Whether the court established elements for warranty recognition are present in this case, as detailed in the case of Sea-Land Service, Inc. v. United States, 683 F. Supp. 1404 (1988). Whether the foreign shipyard work described herein would constitute modifications to the hull and fittings of the vessel so as to render the work nondutiable under 19 U.S.C. 1466. LAW AND ANALYSIS: Title 19, United States Code, section 1466, provides in pertinent part for payment of duty in the amount of fifty 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 trade. In its application of the vessel repair statute, the Customs Service has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. Over the course of years, the identification of work constituting modifications on the one hand and repairs on the other has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a modification that is not subject to duty, the following elements may be considered: 1. Whether there is a permanent incorporation into the hull or superstructure of a vessel (see United States v. Admiral Oriental Line, 18 C.C.P.A. 137 (1930)), either in a structural sense or as demonstrated by the means of attachment so as to be indicative of the intent to be permanently incorporated. This element 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. In addition, some items, the cost of which is clearly dutiable, interact with other vessel components resulting in the need, possibly for that purpose alone, for a fixed and stable juxtaposition of vessel parts. It follows that a "permanent attachment" takes place that does not necessarily involve a modification to the hull and fittings. 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 constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function. 4. Whether an item under consideration provides an improvement or enhancement in operation or efficiency of the vessel. For purposes of section 1466, 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. T.D. 34150, 26 Treas. Dec. 183, 184 (1914)(quoted with approval in Admiral Oriental). The Customs Service has held that the decision in each case as to whether an installation constitutes a nondutiable addition to 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. Even if an article is considered to be part of the hull and fittings of a vessel, the repair of that article, or the replacement of a worn part of the hull and fittings, is subject to vessel repair duties. In the case of Sea-Land Service, Inc. v. United States, 683 F. Supp. 1404 (1988), the Court addressed whether repair work performed on a newly constructed vessel subsequent to its delivery to the owner might be considered to be part of the new construction contract. Simply put, the Court considered whether "completion of construction" is a viable concept so as to render the duty provisions of 19 U.S.C. 1466(a) inapplicable if proven. The Court found completion of new construction to be a valid concept, subject to specific conditions, which are: 1. "All work done and equipment added [must be] pursuant to the original specifications of the contract for the construction of the vessel ...." 2. "This basic standard is limited to work and equipment provided within a reasonable period of time after delivery of the vessel." The contract for construction of the subject vessel contained clauses guaranteeing for twelve (12) months any area of the vessel for which the builder accepted responsibility under the contract and specifications, conditioned upon written notification from the owner of any covered defect within the agreed upon 12-month period. In reviewing the warranty case on remand from the Court, Customs had the opportunity to review the contract, the specifications, and a so-called "guarantee notebook." This document consisted of numerous guarantee items, some generic in nature and some specific, and represented the written notification of defects from the owner to the builder as required by the contract. Each noted defect was recorded on a separate sheet and assigned a "G" guarantee number. Each was dated, signed by an owner's representative and a builder's representative, and contained a short narrative of the specific complaint. In that case, we found that the court-ordered criteria had been satisfied and that the "reasonable period of time" for the warranty period was the one-year period specified in the contract. We have since held likewise in similar cases, and have adopted the one-year limit as the benchmark for honoring new construction warranties which otherwise qualify. The question now to be addressed is whether the Sea-Land Service, Inc., supra., court-ordered criteria and/or contract requirements have been satisfied in this case. In the case under consideration, the protestant has not submitted the new construction contract. We note that the repair bill being protested in this case does not contain any information to the effect that the subject work was done as a part of the new construction warranty. None of the elements of the Sea-Land case has been demonstrated to exit as to the work claimed to be performed under warranty Accordingly, since the record does not contain evidence which satisfies the criteria established in the case of Sea-Land Service, Inc., supra., the protest in this case must be denied. In Headquarters Ruling Letter 110993, this office held that, based on the work order description and accompanying drawing, the proposed installation of the air compressor would be a modification to the vessel that is not subject to duty. However, this advisory ruling stressed that any final determination would be contingent on review of the evidence submitted as part of the entry and procedure for review. The only evidence submitted as part of the protest is an invoice stating that the air compressor was installed. Given the frequency with which work orders are changed, we cannot assume that the work actually performed to install the air compression system was identical to the work proposed in the work order. Without further description of the actual installation process, we are unable to conclude that the installation of the air compressor constitutes a modification to the vessel. Accordingly, protest is denied as to the modification claim. HOLDING: Inasmuch as there is no evidence that the foreign shipyard operations claimed to be covered by warranty were performed pursuant to the conditions of the warranty clause of the contract for construction under consideration, the protest is denied. Notwithstanding the advisory ruling stating that the installation of an air compression system would constitute a modification to the subject vessel, without further description of the actual installation process, we are unable to conclude that the installation of the air compressor constitutes a modification to the vessel. Sincerely, Acting Chief Carrier Rulings Branch