\-

HQ 227171

December 9, 1997

VES-13-18-RR:IT:EC 227171 GG

CATEGORY: Carriers

Chief, Vessel Repair Liquidation Branch

U.S. Customs Service

P.O. Box 2450

San Francisco, CA 94126

RE: Vessel repairs; Vessel R.J. PFEIFFER, V-93; Vessel Repair

Entry \# C27-0147659-3; Repairs under Warranty; Modifications;

Surveys; Cleaning; 19 U.S.C. 1466(a)

Dear Sir:

Reference is made to your memorandum of August 6, 1996,

which forwards for our consideration an application for relief

from duties filed by Matson Navigation Company (\"Matson\").

FACTS:

The U.S. flag vessel M/V R.J. PFEIFFER underwent certain

work at the Hyundai Mipo Shipyard in Ulsan, Korea, during March

and April, 1996. A vessel repair entry was timely filed upon

arrival in the United States. Matson filled an Application for

Relief from vessel repair duties on July 25, 1996. Relief is

sought on several different grounds, namely, that the work

performed was under warranty or was done for an ABS survey, or

involved modifications that are exempt from duty. Some of the

modifications, Matson claims, have already been determined by

Customs to be exempt from duty in a non-binding ruling, HQ

226780\.

A factual discussion of the applicable warranty provisions,

which is presented later in this ruling, is incorporated by

reference into this section.

ISSUE:

Whether the work items under challenge in the Application

for Relief are subject to 19 U.S.C. 1466(a) vessel repair duties?

LAW AND ANALYSIS:

Title 19, United States Code, section 1466(a), provides in

part for payment of an ad valorem duty of 50 percent 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.

Certain work performed overseas is, for a variety of

reasons, not considered to be a repair for duty assessment

purposes. Various items have been referred to us to determine if

they fall under an accepted exemption from duty. A discussion of

each follows.

1\. Work claimed to be covered by warranty.

It is well established that work done and equipment added

pursuant to the specifications of the original contract for the

construction of a U.S. flag vessel are not dutiable under 19

U.S.C. §1466. See Sea-Land Service, Inc. v. United States, 12

CIT 287; 683 F. Supp. 1404 (1988). The question that must

usually be answered is whether work performed on the vessel

subsequent to documentation was necessary to comply with the

original specifications of the construction contract, or

alternatively was repairs within the meaning of the vessel repair

statute. The following factors are considered in making such a

determination: 1) the terms and nature of the guarantee or

warranty clause; 2) when the work was actually performed; and 3)

the nature and purpose of the work and equipment provided. Such

an inquiry seeks to distinguish between a long-term service

contract and a warranty of fitness for use and quality that is

tied to the original construction of the vessel. Hence, Customs

has adopted a one-year limit as the benchmark for honoring new

construction warranties which otherwise qualify. The crucial

factor is notification of the defect by the owner to the

shipbuilder within that period. See Headquarters Ruling Letter

112449, dated March 31, 1993.

There are two warranties involved here. The first is a

guarantee issued by the shipbuilder, National Steel and

Shipbuilding Co. (\"NASSCO\"), as part of the original construction

contract. NASSCO guaranteed work and material for a period of

180 days after delivery of the M/V R.J. PFEIFFER to Matson,

provided that the new owner reported the defects to NASSCO within

the guarantee period. The second type of warranty stems from

deficiency lists that are part of the Certificate of Delivery and

Acceptance of Ship, dated August 9, 1992. Acceptance of the ship

by Matson was made subject to correction by NASSCO of the

acknowledged defects on the list.

To support claims that work completed in Ulsan was covered

by warranty, the petitioner has submitted a July 23, 1996, letter

from NASSCO to Matson confirming that NASSCO accepted the work

performed as guarantee claims within six months of ship delivery.

NASSCO also provided copies of the guarantee reports (\"GDR\'s\")

that brought the warranted defects to its attention.

Hyundai Mipo Invoice Item 011, Stern Tube Sealing

This work involved the repositioning and renewal of the

stern seal and the modification of the stern seal piping. In

support of its position that this was a known problem prior to

delivery of the vessel from NASSCO to Matson, and was covered by

warranty, Matson has presented the following documentation:

\* NASSCO letter - item 5, Stern Tube Seal Misalignment

Problem.

\* Guarantee reports GDR 293, dated October 5, 1992; GDR

501, dated January 1, 1993; and GDR 560, dated

January 19, 1993, bringing the stern tube seal

problems to the attention of the NASSCO guarantee

engineer.

\* Exhibit 1 to the Certificate of Delivery and Acceptance of

Ship listed the stern tube forward seal leak as an

outstanding deficiency item.

Based on this information, we are satisfied that the stern

tube sealing repairs are part of the original construction of the

vessel and accordingly, are not subject to vessel repair duty.

Invoice Item No. 099.1, Drydock Expenses for Stern Tube

Modifications

This invoice item is for the expense of eight drydock days

attributed to the stern tube seal warranty repairs. The

petitioner argues that the total \$22,133.00 drydock cost is
non-dutiable because it reflects the time that was required to

accomplish modifications which are exempt from vessel repair

duty. Where dutiable and non-dutiable work is performed while a

vessel is in drydock, Customs\' policy is to apportion the drydock

expenses between the items which are remissable and those which

are subject to duty. See HRL\'s 226729, dated June 7, 1996, and

227063, dated October 31, 1996. Accordingly, in determining how

much of the current drydock charge is dutiable, Customs will take

into account the total drydock charges incurred on this

particular vessel repair entry and make a calculation based on

the percentage of all repairs that are ultimately deemed to be

dutiable.

Invoice Item No. 019, Chloropac Installation

Installation of new chloropac unit piping in connection with

replacement of defective, original-equipment, Blume chloropac

system.

Supporting documentation:

\* Elcat installation Dwg. 0-73909-0

\* NASSCO letter - item 2, Salt Water Strainer Anode System

\* GDR 383, dated November 8, 1992

This repair item was covered by warranty and is not subject

to vessel repair duty.

Invoice Item No. 021, High/Low Temperature Cooling Modifications

Piping and valves installed to correct balance between high

and low temperature fresh water cooling systems.

Supporting documentation:

\* NASSCO letter, item 3, High/Low Temperature Cooling

Modifications

\* GDR\'s 478, dated January 19, 1993, and 536 (unsigned by

NASSCO), dated December 21, 1992.

This work is covered by warranty and is exempt from vessel

repair duty.

Invoice Item No. 025, Exhaust Gas Expansion Joint Failure

Main engine exhaust expansion joint replaced with new joint

supplied by NASSCO.

Supporting documentation:

\* NASSCO letter - item 6, Exhaust Gas Expansion Joint

Failure

\* Certificate of Delivery and Acceptance of Ship, Exhibit 1,

Schedule 1-A, page 2 of 6, item BT0221CU, acknowledging

exhaust system misalignment problem at time of ship\'s

delivery to Matson.

This work is covered by warranty and is exempt from vessel

repair duty.

Invoice Item No. 026, Exhaust Gas Accumulator Feet Repair

Repair of exhaust gas accumulator mounts damaged during sea

trials. The underlying cause of the damage was determined to be

due to a warrantable condition.

Supporting documentation:

\* NASSCO letter - item 1, Exhaust Gas Accumulator Feet

Repair

\* GDR 620, dated January 20, 1993

This work is covered by warranty and is exempt from vessel

repair duty.

Invoice Item No. 029, Lube Oil Pumps

Vibration of main engine lube oil pumps recognized during

initial sea trials. Pump foundations strengthened with

additional steel plate.

Supporting documentation:

\* NASSCO letter, item 4, Main Lube Oil Pump Foundation

Changes

\* GDR 223, dated November 9, 1992

\* Delivery Documents, Exhibit 1, Schedule 1-B, page 1 of 2,

item BT0503CU, evidencing NASSCO acceptance of vibration

issue at time of delivery of ship to Matson.

This work is covered by warranty and is not subject to

vessel repair duty.

2\. Work not claimed to be under warranty

Invoice Item No. 012, Hull Cleaning

The invoice description of this work is \"clean hull using

high pressure water blast to enable inspection of underwater

surfaces by ABS/USCG\". Customs has long held that the cost of

cleaning is not dutiable unless it is performed as part of, in

preparation for, or in conjunction with dutiable repairs or is an

integral part of the overall maintenance of the vessel. See

Headquarters Ruling Letter (\"HRL\") 113585, dated June 6, 1996.

We note that the next item on the invoice, No. 013, is for the

sandblasting and painting of the exterior hull. Because of the

presence of these dutiable repairs in item No. 013 which may be

related to the cleaning in controversy, and because of the

absence of evidence which could possibly clarify the matter, we

conclude that the cost of the hull cleaning is dutiable.

Invoice Item No. 043, Propeller Polishing

Propeller polishing associated with a periodic ABS survey is

non-dutiable. See HRL\'s 112066, dated January 18, 1994; 112775,

dated June 22, 1993; and 113122, dated March 20, 1996.

Invoice Item No. 024, Ballast Tank Inspection

The petitioner states that the salt water ballast tanks and

cofferdams were opened and cleaned for examination by ABS as part

of the Special Periodical Survey. The shipyard invoice also

notes that upon closing the tanks gaskets \"damaged by inspection\"

were replaced. Opening and closing water tanks is a non-dutiable

operation when it relates to a required ABS survey. HRL 112378,

dated November 30, 1992. Further, articles necessarily destroyed

in the course of opening an area for inspection may be replaced

without duty consequence if no other dutiable repair accompanies

the operation. See HRL 113046, dated June 6, 1996.

Consequently, the costs associated with this invoice item are

exempt from vessel repair duty.

Invoice Item No. 020, Generator Fuel Pipe

The invoice description of the work performed is to \"make

new permanent piping modification to operate generators

individually on diesel fuel\". As a general rule, modifications

to the hull and fittings of a vessel are not dutiable under the

vessel repair statute. Qualifying modifications to the hull and

fittings of a vessel involve a permanent incorporation into the

hull or superstructure of a vessel, provide an improvement or

enhancement in operation or efficiency of the vessel, and may not

involve the replacement of a current part, fitting, or structure

which is not in good working order. See HRL 113585, supra; and

112851, dated March 22, 1996.

The petitioner explains that this work was necessary because

there was no means of cleaning any one particular generator

engine fuel system for maintenance purposes. Further, this was a

new and permanent piping installation to enhance generator engine

maintenance. The installation of the generator fuel pipe is a

modification and is not dutiable.

Invoice Item No. 028, Fuel Level Probes

The petitioner explains that the existing tank fuel level

indicating system on the M/V R.J. PFEIFFER is not fully

trustworthy. For reasons of safety and pollution control, it was

decided to install a permanent redundant system for measuring

liquid in the top of the tanks. The invoice indicates that the

shipyard put in \"new fuel tank level indicating system probes\" to

effect this change. Since this is a replacement of a defective

system that is performing a similar function, this item is

dutiable as a repair.

Invoice Item No. 030, Fuel Oil Piping

The steam supply for heating this vessel\'s fuel oil was

inadequate due to piping restrictions. As a result, only high

grade fuels could be burned, creating high operating costs. The

shipyard installed larger piping and valves to correct this

problem. This work, which is permanent and improves the vessel\'s

efficiency, is a modification which is not subject to duty.

Invoice Item No. 031, Installation of New Bitt

A new tie up bitt was added to the vessel\'s transom to

facilitate the safe handling of the vessel by tug boats. This

new and permanent installation enhances the vessel\'s operation

and constitutes a modification. Therefore, its costs are not

subject to duty.

Invoice Item No. 033, Air Isolation Valve

According to the petitioner, the installation of a control

air isolation valve was necessary to provide maintenance access

to the compressed air system supplying the vessel\'s fire dampers.

This work, which is permanent and improves the ship\'s operation,

qualifies as a non-dutiable modification.

Invoice Item No.\'s 037 and 038, Engine Valve and Turbocharger

Sealing

These items were installed at the recommendation of the main

engine manufacturer to promote enhanced service life for various

parts of the main engine. They are new and permanent

installations to the fittings of the vessel and will result in

improved vessel operation. This work qualifies as a duty-exempt

modification.

Invoice Item 040, Range Anchor Chains

The anchors and chains were ranged and cleaned for ABS

inspection. Although the cleaning and ranging of anchor chain

for inspection by ABS is usually non-dutiable, in this case these

operations were followed by a dutiable repair, namely, the

painting of anchor chain shots. The painting is listed as

Invoice Item 040.1. As noted earlier, the cost of cleaning is

not dutiable unless it is performed as part of, in preparation

for, or in conjunction with dutiable repairs or is an integral

part of the overall maintenance of the vessel. HRL 113585,

supra. In the absence of clear evidence to the contrary, we

conclude that the cleaning of the chains was preparatory to the

subsequent painting operation. Since the cost of the cleaning

was not segregated from the ranging function, the entire amount

listed under invoice item 040 is dutiable.

Invoice Item 042, Vent Fan Removals

The vent fans in question were removed to accommodate the

cargo hold remodeling discussed in the last paragraph of this

ruling. The dutiability of this work is contingent upon what

Customs\' final determination will be in that matter. The removal

of an existing, operational system for the purpose of improving

the efficient performance of the vessel is not dutiable provided

that the work was not performed in conjunction with dutiable

repairs. See HRL\'s 111307, dated February 4, 1991, and 109971,

dated June 12, 1989. Thus, this item will be exempt from duty if

the cargo hold reconfiguration described in HRL 226780 is

ultimately found to be a modification.

Invoice Item 047, Piping Installation

This work involved the welding of a new piece of piping to

allow condensate to return to the shore boiler. This qualifies

as a non-dutiable modification.

Invoice Item 048, Generator Exhaust Pipe

The shipyard installed new thermometers and pressure gauge

bosses on each generator engine exhaust to better monitor the

operation of the vessel\'s three generator engines. Absent

satisfactory evidence showing that this was not simply a

replacement of defective equipment, we find this to be a dutiable

purchase.

3\. Review of Hatch Cover Changes

You requested that we review Invoice No. 10151 (sic), on

which the charges for hatch cover changes are presented. This

work refers to the reconfiguration of the M/V R.J. PFEIFFER\'s

cargo holds as discussed in HRL 226780. In that advisory ruling,

Customs determined that converting existing cargo holds to

accommodate 20 and 40-foot, instead of 24-foot, containers, would

constitute a modification upon presentation of satisfactory

evidence that the work had been completed as described. The

ruling contemplated that the work would involve \"replacing the

existing 24-foot hatch covers and coamings with 40-foot ones.\"

It also noted Matson\'s claim that the current hatch covers were

in good condition and in no need of repair. The invoice gives us

pause because it implies that new hatch covers were installed for

24-foot as well as 40-foot container stowage. This raises the

issue of whether some of this work did in fact involve the

replacement of 24-foot hatches which were in need of repair.

Duty-free treatment is accorded only when permanent additions

enhance the operating efficiency of the vessel and replace a

structure that was in good working order. See HRL\'s 112779,

dated July 26, 1993, and 111224, dated February 19, 1991. Matson

must first clarify this discrepancy between the invoice and the

factual scenario in the ruling before the entire cost of the

hatch work is declared exempt from vessel repair duty. If some

repair work did take place, then those costs must be segregated

from the costs of the non-dutiable modifications.

Sincerely,

Jerry Laderberg

Chief

Entry Procedures and Carriers

Branch