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49 CFR 180.205.C.2.i "Stamp a series of X's over the DOT specification number and marked pressure or stamp " CONDEMED" on the shoulder, top head or neck using a steel stamp." Only a certified Hydro retester may do this.
49 CFR 180.205.C.3 also states the retester must notify the owner in writing that the cylinder is condemned and may not be filled with Hazardous material( yes, compressed air is considered hazmat)
49 CFR 180.205.C.2.iii also allows a retester to render the cylinder incapable of holding pressure instead of obliterating markings "at the direction of the cylinder owner"
In short 49 CFR 180.205 General requirements of requalification of specification cylinders is where you want to look for the no BS answers.
Do you have the reference stateing that upon failure of a hydro test the tank IS TO BE CONDEMNED WITHOUT POSSIBILITY OF RETESTING TO NETGATE THE INITIAL FAILURE STATUS.
It is right in the CFRs that you posted a reference to:
Title 49 180.205 (c)
(2) Each cylinder that fails requalification must be
(i) Rejected and may be requalified in accordance with § 180.211 or
(ii) Condemned in accordance with paragraph (i) of this section.
If you read 180.211 that pertains to DOT 4 Series cylinders. Scuba cylinders a series 3 i.e 3AL or 3AA thus by default the only option is to condemn the cylinder. Note the phrase "must be".