HQ 113813

October 15, 1998

VES-13-18-RR:IT:EC 113813 GEV

CATEGORY: Carriers

Chief, Residual Liquidation and Protest Branch

U.S. Customs Service

6 World Trade Center

New York, New York 10048-0945

RE: Vessel Repair Entry No. 514-3005503-1; S.S. THOMPSON LYKES;

V-34;

Israeli labor; U.S. parts/materials; 19 U.S.C. §

1466(h)(2) and (3)

Dear Sir:

This is in response to your memorandum dated January 10,

1997, which forwards for our review and consideration an

application for relief from the assessment of vessel repair

duties pursuant to 19 U.S.C. § 1466. Our findings are set forth

below.

FACTS:

The S.S. THOMPSON LYKES is a U.S.-flag vessel operated by

Lykes Bros. Steamship co., Inc. Subsequent to the completion of

shipyard work in Israel, the vessel arrived at Port Elizabeth,

N.J., on September 13, 1996. A vessel repair entry was timely

filed.

Pursuant to an authorized extension of time, an application

for relief with supporting documentation was timely filed. The

applicant seeks relief for Item Nos. 1 through 12-A. With

respect to Item Nos. 1-4, the applicant seeks relief pursuant to

the United States-Israel Free Trade Area Implementation Act of

1985\. As for Item Nos. 5 through 12-A, the applicant\'s basis for

relief is that the articles under consideration are of U.S.

origin and/or manufacture.

ISSUE:

1\. Whether evidence is presented sufficient to justify the

duty-free treatment of costs incurred in Israel pursuant to the

United States-Israel Free Trade Area Implementation Act of 1985,

as partially implemented by Presidential Proclamation 5924 of

December 21, 1988.

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2\. Whether evidence is presented sufficient to justify

duty-free treatment under 19 U.S.C. § 1466 for the costs of those

articles for which the applicant alleges are of U.S.-origin

and/or manufacture.

LAW AND ANALYSIS:

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

pertinent part for 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 be employed in such

trade.

In regard to the Israeli labor charges for which the

applicant seeks relief, it is noted that on December 21, 1988,

the President issued Proclamation number 5924 under authority of

section 4(a) of the United States-Israel Free Trade Area

Implementation Act 1985, which Proclamation provides that vessel

repair duties shall not be assessed on the cost of parts,

equipment or materials for, or repairs to U.S. vessels if the

subject expenditures are for products of Israel or work done in

Israel. Customs interprets this to mean that articles must be

made in and installed on vessels in Israel. Articles imported

into Israel from elsewhere do not qualify for the automatic duty

exemption.

Upon reviewing the record we note that the invoices from

Israel Shipyards Ltd. and the American Bureau of Shipping provide

a sufficient breakdown of the costs of Israeli labor and articles

which were made in Israel. Accordingly, those costs for which

the applicant seeks relief that are covered by Item Nos. 1-4 are

exempt from duty pursuant to Proclamation 5924.

In regard to the applicant\'s claim for relief for Item Nos.

5 through 12-A based on U.S. origin and/or manufacture, we note

that 19 U.S.C. § 1466(h)(3) provides as follows:

The duty imposed by section (a) of this section shall

not apply to-

\...

\(3\) the cost of spare parts necessarily installed

before the first entry into

the United States, but only if duty is paid under

appropriate commodity

classifications of the Harmonized Tariff Schedules of

the United States

upon first entry into the United States of each such

spare part purchased

in, or imported from, a foreign country. (Emphasis

added)

For the purpose of 19 U.S.C. § 1466(h), we have defined a

\"part\" as follows:

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 identify a part. The

term part does not

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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.

Upon reviewing the application and supporting documentation,

we note that the remainder of the items for our consideration

fall within the duty-free exemption of 19 U.S.C. § 1466(h)(3)

with the exception of Item Nos. 5, 5-A, 6-B and 11. Item Nos. 6-B and 11
cover U.S. prepaid freight/shipping costs for non-dutiable parts and are
therefore nondutiable.

Item Nos. 5 and 5-A cover paint/coatings. With respect to

these costs it should be noted that § 1466(h)(3) is a claim for

relief which is available only to parts, not materials such as

paint. Relief is available for paint under § 1466(h)(2),

provided the requisite criteria are met. That statutory

provision is set forth below:

The duty imposed by subsection (a) of this section

shall not apply to-

\(2\) the cost of spare repair parts or materials (other

than nets or nettings)

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 clas-

sifications 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, or

19 U.S.C. § 1466(h)(2) contemplates entry of the pertinent

part or material, and the payment of duty under the appropriate

commodity classification of the HTSUS, prior to the use of the

pertinent part or material in the foreign shipyard. In regard to

Item Nos. 5 and 5-A, we note that while § 1466(h)(2) applies by

its terms only to foreign-made imported parts or materials, there

was ample reason to extend its effect to U.S.-made parts or

materials as well. To fail to do so would act to discourage the

use of U.S.-made parts or materials in effecting foreign repairs

since continued linkage of remission provisions of subsection

1466(d)(2) with the assessment provisions of subsection (a) of §

1466 would obligate operators to pay duty on such materials

unless they were installed by crew or resident labor.

Consequently, Customs so extended the duty-free treatment of

subsection (h) to U.S.-manufactured parts or materials (See,

e.g., Customs ruling letter 110980, dated April 16, 1991) In

this regard, we note that the applicant has submitted

documentation sufficient to prove that the paint/coatings covered

by Item Nos. 5 and 5-A were manufactured in the United States.

Accordingly, the applicant\'s claim for relief for these items is

granted.

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HOLDING:

1\. Evidence is presented sufficient to justify the duty-free treatment
of costs incurred in Israel pursuant to the United

States-Israel Free Trade Area Implementation Act of 1985, as

partially implemented by Presidential Proclamation 5924 of

December 21, 1988.

2\. Evidence is presented sufficient to justify duty-free

treatment under 19 U.S.C. § 1466 for the costs of those articles

for which the applicant alleges are of U.S.-origin and/or

manufacture.

Sincerely,

Jerry Laderberg

Chief

Entry Procedures and Carriers

Branch