**HQ 116426**

March 23, 2006

**VES-3-18-RR:BSTC:CCI** 116426 GOB

**CATEGORY:** Carriers

Chief, Vessel Repair Unit

U.S. Customs and Border Protection

P.O. Box 1389

Kenner, LA 70063

**RE:** 19 U.S.C. 1466; Vessel Repair Entry C53-0035048-1; Protest
5301-04-100261; M/V AMERICAN MERLIN, V-1

Dear Sir:

This is in response to your memorandum of March 8, 2005, forwarding for
our review the protest filed on behalf of Merlin Shipholding Corporation
("protestant") with respect to Vessel Repair Entry C53-0035048-1. We met
with the representatives of the protestant on May 24, 2005. The
protestant made two additional submissions dated August 12, 2005, and a
further submission dated March 7, 2006. Our ruling follows.

**FACTS:**

The M/V AMERICAN MERLIN (the "vessel") is a U.S.-flag vessel owned
and/or operated by the protestant. It incurred foreign shipyard costs in
the course of its voyage. The vessel arrived in the port of Houston on
August 13, 2000. A vessel repair entry was timely filed. Your office
denied the application for relief on May 1, 2003. The petition for
relief was denied by HQ 116037, dated October 3, 2003. In addition to
the claims set forth in the protest and the protestant's additional
submissions, we have carefully considered the claims put forth by the
protestant at a conference held on May 24, 2005.

Any item numbers used in this ruling reflect the numbers used by the
protestant on the spreadsheets (summary spreadsheet and entry summary
continuation sheet) which accompanied its March 7, 2006 submission. In
its summary spreadsheet (March 7, 2006 submission), the protestant has
indicated with respect to each item, its claimed basis for relief. Where
the protestant has stated "NONE," such indication means the protestant
is not requesting relief from the vessel repair duty with respect to
that item.

**ISSUE:**

Whether the costs for which the protestant seeks relief are subject to
duty under 19 U.S.C. § 1466?

**LAW AND ANALYSIS:**

19 U.S.C. 1466 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.

# Protestant's Proration Claim

In *SL Service, Inc. v. United States*, 357 F.3d 1358 (Fed. Cir. 2004),
*rev'g* 244 F. Supp. 1359 (Ct. Int'l Trade 2002), *cert. denied*
December 13, 2004, the Court of Appeals for the Federal Circuit upheld
CBP's proration of certain shipyard expenses. The court stated in
pertinent part as follows:

. . . apportionment is consistent with section 1466(a) and the "but for"
test. In the context of dual-purpose expenses, it is rational to impose
the duty on only that portion of the expense that is fairly attributable
to the dutiable repairs. Indeed, to impose the 50% *ad valorem* duty on
the entire costs of dry-docking in this case would exceed the mandate of
the statute. The logical appeal of apportionment has been recognized in
other areas of the law . . .

. . .

Customs' long-standing practice of apportioning the cost of various
expenses between dutiable repairs and non-dutiable inspections and
modifications comports with both the statute and common sense.

The protestant claims that certain items should be prorated, i.e.,
certain costs within items 69, 128, 144, 175, and 176 on the summary
spreadsheet. We concur.

We further find that the following additional costs within items 69 and
128, which the protestant claims are nondutiable, should be prorated
between dutiable and nondutiable costs: item 69 -- haulage and
towage/tugs; and item 128 -- tugs and wharfage. Finally, within item
144, the cost for tugs and wharfage should be prorated between dutiable
and nondutiable costs.

# 

# 

# Protestant's Modification Claim

In its application of the vessel repair statute, CBP has held that
modifications, alterations, or additions to the hull of a vessel are not
subject to vessel repair duties. The identification of work constituting
modifications vis-a-vis work constituting repairs has evolved from
judicial and administrative precedent. In considering whether an
operation has resulted in a nondutiable modification, the following
factors have been considered. These factors are not by themselves
necessarily determinative, nor are they the only factors which 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 which is
nondutiable under 19 U.S.C. 1466:

1\. Whether there is a permanent incorporation into the hull or
superstructure of a vessel, either in a structural sense or as
demonstrated by means of attachment so as to be indicative of a
permanent incorporation. See *United States v. Admiral Oriental Line*,
18 C.C.P.A. 137 (1930). However, we note that a permanent incorporation
or attachment does not necessarily involve a modification; it may
involve a dutiable repair or dutiable equipment.

2.  Whether in all likelihood an item would remain aboard a vessel
    during an extended lay-up.

3\. Whether an item 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 provides an improvement or enhancement in operation
or efficiency of the vessel.

Via the summary spreadsheet, the protestant claims that items 76 and 156
involve nondutiable modifications. The invoice for item 76 includes
repairs. The invoice for item 156 reflects that work was performed on
the boiler. The protestant has not established by satisfactory
documentary evidence that this work constitutes a nondutiable
modification. Accordingly, we find that these costs are dutiable.

# Protestant's Casualty Claim

Title 19, United States Code, section 1466(d)(1) (19 U.S.C. §
1466(d)(1)) provides in part that the Secretary is authorized to remit
or refund such duties if the owner or master of the vessel furnishes
good and sufficient evidence that the vessel was compelled by stress of
weather or other casualty to put into a foreign port and make repairs to
secure the safety and seaworthiness of the vessel to enable her to reach
her port of destination. Section 4.14(h)(2)(i), Customs and Border
Protection ("CBP") Regulations (19 CFR § 4.14(h)(2)(i)) provides that
\"port of destination\" means such port in the United States.

Section 1466(d)(1) and 19 CFR § 4.14(h)(2)(i) essentially set forth a
three-part test, each of the elements of which must be established by
good and sufficient evidence to qualify for remission:

1\. a casualty occurrence;

2\. an unsafe and unseaworthy condition; and

> 3\. the inability to reach the port of destination in the U.S. without
> foreign repair.

19 CFR § 4.14(h)(2)(i) provides in pertinent part as follows:

. . . For the purposes of this paragraph, a "casualty" does not include
any purchase or repair made necessary by ordinary wear and tear, but
does include the failure of a part to function if it is proven that the
specific part was repaired, serviced, or replaced in the United States
immediately before the start of the voyage in question, and then failed
within six months of that date.

In T.D. 71-83 (38), Customs (now CBP) stated as follows:

> If satisfactory evidence is furnished clearly showing any
> [part]{.underline} of a vessel to have been repaired and/or serviced
> just prior to the commencement of a voyage from a United States port,
> it is reasonable to assume [that the part]{.underline} is seaworthy
> for a round voyage, foreign and return. Unless evidence indicates some
> other reason necessitated the repairs during the voyage, failure of
> [that part]{.underline} to function within six months after the repair
> and/or servicing in the United States may be considered a casualty
> within the meaning of \[19 U.S.C. 1466(d)\]. [However, remission of
> duty under that statute in the circumstances is limited to duty on the
> essential, minimum foreign repairs to the parts]{.underline}. . .
> \[All emphasis added.\]

The protestant states in pertinent part as follows:

. . . the repairs done abroad to the port main engine fall squarely
within the "One Round Voyage" rule and qualify for remission under 19
C.F.R. 4.14(h)(2)(i). The specific part that was separated and serviced
in the U.S. and which experienced the catastrophic explosion and was
repaired abroad is the crankshaft assembly. As documented herein, the
owners of the MERLIN employed Premier Engine (an authorized Pielstick,
the manufacturer, engine repair facility) to inspect, repair and service
the entire crankcase and crankshaft assembly and all parts associated
with it in Houston, Texas immediately before the commencement of the
Voyage 1, during which the ship experienced the catastrophic explosion
in the port main engine. Before commencing the voyage, the service
representatives conducted a complete crankcase inspection, checking all
connecting rods for proper fit on the crank pins, also checking for any
sign of damage or wear, and proper lube oil flow from the underside of
each piston. No unusual conditions were found. Any deficiencies found
were corrected. Inspections were also made by the American Bureau of
Shipping ("ABS") and the vessel was determined to be

seaworthy . . . . These inspections were completed only 15 days before
the catastrophic explosion.

The protestant has submitted numerous documents in support of its
claims.

The statement of a consultant engineer (a "Certified Pielstick Engine
Service Engineer"),who was involved in the domestic repairs, provides in
pertinent part as follows:

In the course of these inspections, repairs and service we obtained
access to the crankshaft and its bearings as well as other bearings and
parts connected to the crankshaft. Our inspections involved all parts
connected to the crankshaft, including all connecting rods and the
bearings connecting them to the crankshaft.

. . .

The inspections undertaken by me and my assistants, together with the
ship's crew, constituted a thorough-going repair, inspection and
servicing of the port main engine's crankshaft and connecting rods. Any
deficient bearings were replaced and those inspected and found not
deficient were confirmed to be in good operating order.

. . .

Connecting rods for this type of engine are designed to have a\[n\]
indefinite lifespan. These components do not experience normal wear and
tear which would result in the catastrophic failure described in the
Osprey Ship Management submission. Failure of components in this
design-category is always due to one or several extraordinary events,
and emergency repair is usually the only alternative to towing the
vessel.

Considering the complete thorough inspection of the crankshaft,
connecting rods and engine block conducted by me and my assistants, it
is my opinion that the failure experienced on the port main engine
cannot be contributed \[sic\] to normal wear and tear.

The statement of the vessel's chief engineer describes the work
performed in the United States prior to the subject voyage as follows:

On 22 February 2000 Pielstick representatives from Premier Engines took
crankshaft deflections on the Port Main Engine. At this time they also
performed a complete crankcase inspection on that engine along with
\[the\] Port Engineer . . . . This inspection included checking all
connecting rods for proper fit on the crank pins, any sign of damage or
wear, and proper lube oil flow from the underside of each piston. No
unusual conditions were noted.

In the same statement, the chief engineer describes part of the subject
foreign voyage as follows:

On the morning of the 10^th^ of March, at 0520 hours, the watch engineer
and OMU had just returned to the control room after making rounds of the
engine room. All conditions seemed normal. They were at the log desk in
the control room when they heard a loud noise. There had been no alarms,
or warning. The OMU went into the engine room to investigate, and the
watch engineer went to check the control console and gauges. The OMU
reported that the inspection covers were off the port main engine, with
smoke and sparks in the engine room. The watch engineer shut down both
main engines, notified the bridge, and called me. When I arrived in the
engine room minutes later, the port main engine lube oil pump, port main
engine rocker arm lube oil pump, port main engine fuel pump and valves,
port main engine jacket water and injector cooling pumps and isolation
valves had been secured. At this point there was no threat of fire, and
no one had sustained any personal injuries. Upon investigation the port
main engine crankcase door from cylinder #11 was found on the deck,
along with part of a connecting rod. The #11 piston connecting rod had
broken, resulting in damage to #11 piston and liner, #2 piston and
liner, the crankcase doors at cylinders #2 and #11 and the surrounding
areas of the crankcase. I notified the bridge and Captain of the
situation, and verified the condition of the starboard main engine.
Preparations were then made and by 0708 hours the starboard main engine
was restarted.

An American Bureau of Shipping ("ABS") report dated April 5, 2000
described the following conditions to be repaired or renewed: piston no.
2 broken at lower part; piston no. 11 broken at lower part and heavily
scored; liners no. 2 and 11 broken; connecting rod no 11 broken at its
lower part, and upper and lower bearing shells damaged; no. 2 connecting
rod bearing shell scored; crankpin no. 2 worn down to a maximum of 8 mm
in way of no. 11 connecting rod bearing, and crankshaft bent up to 0.5
mm maximum between the main bearing nos. 2 and 3; connecting rod bearing
shell nos. 1, 3, 10, and 12 variously whipped and scored; main bearing
shell nos. 2 and 3 variously scored; and main engine "A" frame distorted
on starboard side and broken on port side, above the inspection doors in
way of no. 11 connecting rod. The ABS report also recommended the
following work: remaining parts and systems of the port main engine to
be opened up, examined, repaired and/or renewed as necessary; removals
necessary to effect repairs to be placed as they originally were;
crankcase and sump tank to be cleaned, oil pipes to be flushed with
clean oil and sump tank to be filled with new oil; and upon completion
of repairs the port main engine to be tested during dock and/or sea
trials.

An Interim Survey Report of the Salvage Association dated June 7, 2000,
appears to be generally consistent with the other documentation
submitted.

The documentation submitted by the protestant also includes an ABS
Damage/Repair Survey dated June 8, 2000 and a report dated June 29, 2000
by the consulting engineers.

After careful consideration, we find that the protestant has provided
good and sufficient evidence in support of its claim under 19 U.S.C. §
1466(d)(1). Therefore, that claim is granted with respect to the costs
for which that claim has been asserted.

[Protestant's Claim re Credits]{.underline}

At the conference on May 24, 2005, the protestant provided a "summary of
spreadsheet errors," in which it claims that certain credits (three)
should be applied and that one invoice was "applied twice." Your office
has reviewed these claims and we have arrived at the following
determinations in conjunction with your office. The first item listed
(contained within item 128) was applied by your office as an expense.
Your office will eliminate this expense of repairs, *i.e*., duty will
not be assessed against the sum of this claimed credit. However, we find
that the protestant has not provided satisfactory documentary evidence
to establish that the sum on this "credit" sheet, as well as the sum on
the next two claimed credit sheets (a sheet after item 134 and a sheet
within item 136) should be credited, or deducted, from the expenses of
repairs. Accordingly, this credit claim is denied. The fourth item, in
the amount of FRF55,280.50 (Macor Neptun invoice no. 2005314, p. 2),
listed on the summary of spreadsheet errors indicates that duty was
applied twice against a certain cost. Your office advises that duty was
in fact applied twice because duplicate documents were submitted for
this cost. Accordingly, your office will eliminate the duplicative duty.

[Protestant's Claim with respect to 19 U.S.C. § 1466 (h)(3)]{.underline}

Title 19, United States Code, section 1466(h)(3) provides as follows:

> The duty imposed by subsection (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\[.\]

In consultation with your office, we find that the items listed on the
Entry Summary Continuation Sheet qualify for treatment under 19 U.S.C.

§ 1466(h)(3) except for the following items, as numbered on the Entry
Summary Continuation Sheet: 14, 22, 32, 43, 44, 45, 49, 66, 161, 163,
165, 168, 169, 173, 175, 176, 177, 190, and 194. Numerous of the items
for which the protestant has claimed treatment under 19 U.S.C. §
1466(h)(3) are within the scope of the protestant's casualty claim.

We have addressed the items your office has asked us to address. Any
remaining items relating to the subject protest will be addressed by
your office.

**HOLDING:**

The costs for which the protestant seeks relief are nondutiable or
remissible in part and dutiable in part under 19 U.S.C. § 1466 as
discussed in the Law and Analysis section of this ruling.

With respect to the items addressed in this ruling, you are instructed
to grant the protest in part and deny the protest in part.

In accordance with the Protest/Petition Processing Handbook (CIS HB,
January 2002, pp. 18 and 21), 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 CBP personnel, and to the public on the CBP Home
Page on the World Wide Web at www.cbp.gov, by means of the Freedom of
Information Act, and other methods of public distribution.

Sincerely,

Glen E. Vereb

Chief

Cargo Security, Carriers, and Immigration Branch