Vessel Repair Entry No. C04-0031196-2; 19 U.S.C. 1466; SEA-LAND SPIRIT; Protest; Warranty work; Sea-Land Service v. U.S.

HQ 114635 March 18, 1999 VES-13-18-RR:IT:EC 114635 GOB CATEGORY: Carriers Port Director of Customs Attn.: Residual Liquidation and Protest Branch, Room 761 Six World Trade Center New York, N.Y. 10048 RE: Vessel Repair Entry No. C04-0031196-2; 19 U.S.C. 1466; SEA-LAND SPIRIT; Protest; Warranty work; Sea-Land Service v. U.S. Dear Madam: This is in response to your memorandum of February 26, 1999, which forwarded the protest submitted by Sea-Land Service, Inc. (“protestant”) with respect to the above-referenced vessel repair entry (your control no. 1001-99-200123). FACTS: The SEA-LAND SPIRIT (the “vessel”), a U.S.-flag vessel, arrived at the port of Oakland, California on May 19, 1998. The subject vessel repair entry was timely filed. The vessel underwent certain foreign shipyard work in March and April of 1998. By letter of September 18, 1998, your office denied the application for relief with respect to the subject entry. ISSUE: Whether the subject items are dutiable pursuant to 19 U.S.C. 1466? LAW AND ANALYSIS: 19 U.S.C. 1466(a) provides for the payment of duty at a rate 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 be employed in such trade. The two items at issue are described separately on the CF 226 as: “Waranty [sic] repair GMDSS - required by law - no charge.” In its protest, the protestant states: “Both items were under warranty by Radio Holland and there was no charge to Sea-Land. Enclosed is the purchase order, invoice and warranty specs related to the installation of the GMDSS.” Sea-Land Service, Inc. v. U.S., 683 F.Supp. 1404, 12 CIT 287 (1988) is the primary controlling authority with respect to this protest. With respect to 19 U.S.C. 1466 generally, the court in Sea-Land stated: It is evident from the legislative history of 19 U.S.C. § 1466, a revision of section 466 of the Tariff Act of 1930, that the basic purpose of the foreign repair statute was to protect American labor. See H.R. Rep. No. 7, 71st Cong., 1st Sess. 4 (1929). In Suwannee Steamship Co. v. United States, the court noted that the unsuccessful attempts in the House of Representatives to amend section 466 so as to increase greatly the situations in which duties were to be remitted to shipowners, were indicative of the strong measures sought by Congress to protect the domestic shipbuilding industry. See 79 Cust. Ct. 19, 25-26, C.D. 4708, 435 F. Supp. 389, 393-94 (1977). Simply stated, the statute is intended “to encourage U.S. shipowners to employ U.S. labor whenever possible.” Mount Washington Tanker Co. v. United States, 69 CCPA 23, 28, 665 F.2d 340, 344 (1981). With respect to the specific matter in controversy in the Sea-Land case, the court stated: The court has carefully considered the governing legislation, relevant case law, testimony of record, and the parties’ proposed joint legal standard. It is the holding of the court that as to those items in dispute, the applicable standard or criterion is that work done or equipment added pursuant to the specifications of the original contract for the construction of the vessel, are not dutiable. Hence, all work performed and equipment added, not required by the contract [i.e., the original construction contract] are dutiable items under the foreign repair statute. [Emphasis added.] Customs has had the occasion to apply the concepts articulated by the court in Sea-Land in numerous rulings. In Ruling 113723 we excerpted two such rulings (as well as excerpted one pre-Sea-Land ruling, and referred to another pre-Sea-Land decision): In Ruling 112009 dated January 13, 1992, we stated: The vessel was also painted under warranty by Mitsubishi Heavy Industries, Ltd. (MHI) with locally manufactured paint supplied by International Paint Company from local stocks. Because Sea-Land was not charged for this work, it seeks remission of the duty related to this repair (item 15 and 16). ... ...in Sea-Land Service, Inc. v. United States, 83 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." Absent evidence indicating that the warranty repairs are considered to be part of a new construction contract, work done under a warranty agreement is considered a repair under the vessel repair statute and the cost thereof is dutiable. (See C.S.D. 8150). In Ruling 112532 dated March 14, 1995, we stated: With respect to item 28, the applicant asks for relief with respect to the cost of paint which it claims was supplied "at no cost under guarantee by 'CMP' and China Shipbuilding Corporation." We find that the cost of the paint is dutiable. We note initially that the applicant has not provided any documentation in support of its claim that the paint was supplied to it at no cost. We note additionally that it has been Customs' position that warranty work falls within the scope of dutiability pursuant to 19 U.S.C. 1466 unless such work falls within the scope of SeaLand Service, Inc. v. United States, 683 F.Supp. 1404 (C.I.T. 1988), which recognized the validity of warranties issued in the context of new vessel construction. In C.S.D. 81-50, which was cited in Ruling 112009, we stated: Counsel states that the warranty items are not dutiable because they were completed at no charge to the vessel owner. In a decision dated June 9, 1976, Customs held that repairs covered by a service agreement contract are dutiable under 19 U.S.C. 1466 even though the vessel owner was not charged for the repairs. C.I.E. 542/62 held repairs to a radar unit dutiable even though the repairs were effected under a repair contract and the costs were not borne by the vessel owner. [End of excerpt from Ruling 112009.] The work at issue in this protest is not warranty work in connection with the original construction of the vessel. The work at issue is warranty repair work to the GMDSS, i.e., the global marine distress and safety system. Therefore, in accordance with the Sea-Land decision, the legislative history with respect to the purpose of 19 U.S.C. 1466 (see the excerpt above from the Sea-Land decision), and our numerous rulings prior and subsequent to the Sea-Land decision, relief is not warranted. HOLDING: The protest should be DENIED. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, 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 Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.customs.ustreas.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Jerry Laderberg Chief, Entry Procedures and Carriers Branch