[Federal Register Volume 81, Number 218 (Thursday, November 10, 2016)]
[Notices]
[Pages 79041-79043]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27159]


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DEPARTMENT OF HOMELAND SECURITY

U.S. Customs and Border Protection


Notice of Issuance of Final Determination Concerning Certain 
Treadmills

AGENCY: U.S. Customs and Border Protection, Department of Homeland 
Security.

ACTION: Notice of final determination.

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SUMMARY: This document provides notice that U.S. Customs and Border 
Protection (``CBP'') has issued a final determination concerning the 
country of origin of certain treadmills. Based upon the facts 
presented, CBP has concluded that, for purposes of U.S. Government 
procurement, the country of origin of the treadmills is the United 
States in Scenario One and Taiwan in Scenario Two.

DATES: The final determination was issued on November 1, 2016. A copy 
of the final determination is attached. Any party-at-interest, as 
defined in 19 CFR Sec.  177.22(d), may seek judicial review of this 
final determination within December 12, 2016.

FOR FURTHER INFORMATION CONTACT: Ross Cunningham, Valuation and Special 
Programs Branch, Regulations and Rulings, Office of Trade (202) 325-
0034.

SUPPLEMENTARY INFORMATION: Notice is hereby given that on November 1, 
2016, pursuant to subpart B of Part 177, U.S. Customs and Border 
Protection Regulations (19 CFR part 177, subpart B), CBP issued a final 
determination concerning the country of origin of certain treadmills, 
which may be offered to the U.S. Government under an undesignated 
government procurement contract. This final determination, HQ H262943, 
was issued under procedures set forth at 19 CFR part 177, subpart B, 
which implements Title III of the Trade Agreements Act of 1979, as 
amended (19 U.S.C. 2511-18). In the final determination, CBP concluded 
that in both scenarios, the processing in the United States or in 
Taiwan results in a substantial transformation. Therefore, for purposes 
of U.S. Government procurement, the country of origin of the treadmills 
is the United States in Scenario One and Taiwan in Scenario Two.
    Section 177.29, CBP Regulations (19 CFR 177.29), provides that a 
notice of final determination shall be published in the Federal 
Register within 60 days of the date the final determination is issued. 
Section 177.30, CBP Regulations (19 CFR 177.30), provides that any 
party-at-interest, as defined in 19 CFR 177.22(d), may seek judicial 
review of a final determination within 30 days of publication of such 
determination in the Federal Register.

    Dated: November 1, 2016.
Alice A. Kipel,
Executive Director, Regulations and Rulings, Office of Trade.

HQ H262943

November 01, 2016

OT:RR:CTF:VS H262943 RMC

CATEGORY: Country of Origin

John A. Knab
Garvey Shubert Barer PC
1000 Potomac Street NW
Suite 200
Washington, DC 20007

Re: U.S. Government Procurement; Country of Origin of Treadmills; 
Substantial Transformation

Dear Mr. Knab:

    This is in response to your letter dated March 16, 2015, 
requesting a final determination on behalf of Johnson Health Tech 
North America (``Johnson'') pursuant to subpart B of Part 177 of the 
U.S. Customs and Border Protection (``CBP'') Regulations (19 CFR 
part 177). Under these regulations, which implement Title III of the 
Trade Agreements Act of 1979 (``TAA''), as amended (19 U.S.C. Sec.  
2511 et seq.), CBP issues country of origin advisory rulings and 
final determinations as to whether an article is or would be a 
product of a designated country or instrumentality for the purposes 
of granting waivers of certain ``Buy American'' restrictions in U.S. 
law or for products offered for sale to the U.S. Government. This 
final determination concerns the country of origin of treadmills. As 
a U.S. importer, Johnson is a party-at-interest within the meaning 
of 19 CFR Sec.  177.22(d)(1) and is entitled to request this final 
determination.

Facts

    Johnson is an exercise equipment manufacturer based in Cottage 
Grove, Wisconsin. It is a wholly-owned subsidiary of the Taiwanese 
entity Johnson Health Tech. Co., Ltd. (``JHT''). JHT, through its 
subsidiaries, operates in Taiwan, China, and the United States.
    The equipment at issue is the Matrix[supreg] T3xe commercial 
treadmill. Johnson describes the Matrix[supreg] T3xe as a ``state of 
the art, electric, motorized treadmill controlled by software in a 
control box located in a user-friendly console supported by a 
console mast.''
    In its submission, Johnson describes two scenarios for 
assembling the Matrix[supreg] T3xe. In short, the first involves 
welding the metal components comprising the treadmills' major 
subassemblies in the United States, assembling the components in the 
United States to form the finished product, and then partially 
disassembling the treadmills for shipment to U.S. customers. The 
second is similar to the first, except that the welding and assembly 
will occur in Taiwan before the finished treadmill is partially 
disassembled and sent to the U.S. customer.

[[Page 79042]]

1. Scenario One--Final Assembly in the United States

a. Design in the United States

    Johnson states it designs and engineers the Matrix[supreg] T3xe 
and similar models of treadmills in Wisconsin based on product 
development done in the United States and in consultation with 
designers and engineers in Taiwan. The engineering and design group 
uses SolidWorks software to create 3D computer-aided design 
(``CAD'') models and 2D models for use as diagrams to guide the 
manufacturing process. Each treadmill generally has between 200 and 
400 2D CAD drawings representing between 400 and 700 separate 
components or subassemblies used in the treadmill.
    Johnson also states that the Matrix[supreg] T3xe's console 
software is designed in the United States, while the ``detailed 
coding'' is done in Taiwan.

b. Component Parts and Materials Come From China & Other Countries

    According to the bill of materials that Johnson provided, the 
Matrix[supreg] T3xe consists of approximately 466 individual parts. 
The vast majority of these parts are produced in China from Chinese 
materials.
    Under both scenarios, however, the Matrix[supreg] T3xe will also 
include some parts from the United States, Italy, and Taiwan. Under 
Scenario 1, the coated wooden deck that comprises the base will be 
of U.S. origin, and the elastic belt that the user walks on will be 
of Italian origin. Additionally, the elastometer, the cover for the 
driver motor, the television tuner, and the heart-rate monitor will 
be of Taiwanese origin. All other parts will be of Chinese origin.

c. Assembly, Time & Employees

i. Description of Major Subassemblies

    Johnson states that the finished treadmills will consist of 
three major subassemblies: (1) the treadmill base; (2) the console; 
and (3) the console mast.
    The treadmill base is the part of a treadmill that lies flat on 
the floor. It comprises a deck and belt that form the running 
surface; a set of motors and rollers that control the speed of the 
belt and the pitch of the running surface; and side rails and covers 
to protect the equipment and the user. These parts are joined 
together by numerous bolts, washers, and screws.
    The console is essentially the computer that allows the user to 
control the treadmill's operation. It is situated roughly at chest 
height to allow the user to adjust the treadmill while in operation. 
Here, it consists of a touch-screen display and also incorporates a 
heart-rate monitor and a television tuner.
    The console mast houses the console and connects it to the 
treadmill base. It also incorporates left and right arms to support 
the user and a rack for reading materials.

ii. Chinese Operations

    In China, the console control board will be assembled and the 
rest of the parts that make up the finished treadmill will then be 
shipped to the United States for assembly.

iii. Assembly & Testing in the United States

    Johnson describes the U.S. assembly process as involving welding 
various components and ``connecting, lining up, adjusting and 
bolting frames, tightening and torqueing frame bolts, attaching 
motors, installing power switches, wiring, pulleys and filters.'' 
First, workers will weld together the metal frames that comprise the 
three major subassemblies. The treadmill base will require 18 
welding seams, the console frame, which houses the console, will 
require seven welding seams, and the console mast will require two 
welding seams.
    Once the major subassemblies have been welded together, several 
major components will be assembled including the console parts, 
console mast parts, rollers, side rails, and deck and belt. The 
rollers, side rails, and deck and belt will then be combined with 
the metal treadmill base to form the ``rudimentary base.''
    Next, the electronic components will be bolted and wired into 
the rudimentary base to make the motorized and operational treadmill 
base. The U.S. assembly team will then temporarily assemble and wire 
the motorized base with the console and the console mast to make the 
substantially final product. The product will then be spot-checked 
and subjected to quality control and operational testing.
    This quality control and operational testing will involve 
bringing the finished treadmills to a ``quiet room'' to ensure that 
the treadmill is operating properly. During testing, the assembler 
will run tests at different speeds and elevations and use natural 
hearing, noise detection equipment, and a vibrograph to check for 
unusual noises and vibrations.
    Johnson estimates that the total time necessary for U.S. 
assembly and testing will be 116 minutes.

iv. Labor in the United States

    Johnson estimates that assembly in the United States under 
Scenario 1 will require 68 employees. This figure includes employees 
involved in the assembly process from sub-assembly welding, 
assembly, quality control, and packaging, but does not include those 
involved in design, engineering, or post-assembly installation.

v. Disassembly for Shipment

    Finally, the finished product will be partially disassembled by 
separating the treadmill base from the console and the console mast 
so that it can be packaged for shipment to U.S. customers.

2. Scenario Two--Final Assembly in Taiwan

    As noted above, Scenario Two is similar to Scenario One, with 
the key difference being that the subassembly-welding and final-
assembly operations will occur in Taiwan before the finished 
treadmill is partially disassembled and sent to the U.S. client. In 
addition, certain parts that are Chinese in Scenario One will be 
swapped out for Taiwanese parts in Scenario Two (specifically, the 
motor chassis, the side rails, the roller set, the packaging box, 
the polystyrene set, and the screw set).

Issue

    What is the country of origin for purposes of U.S. Government 
procurement of the Matrix[supreg] T3xe treadmill under Scenario 1 
and Scenario 2?

Law and Analysis

    Pursuant to Subpart B of Part 177, 19 CFR Sec.  177.21 et seq., 
which implements Title III of the Trade Agreements Act of 1979, as 
amended (19 U.S.C. Sec.  2511 et seq.), CBP issues country of origin 
advisory rulings and final determinations as to whether an article 
is or would be a product of a designated country or instrumentality 
for the purposes of granting waivers of certain ``Buy American'' 
restrictions in U.S. law or practice for products offered for sale 
to the U.S. Government.
    Under the rule of origin set forth under 19 U.S.C. Sec.  
2518(4)(B):
    An article is a product of a country or instrumentality only if 
(i) it is wholly the growth, product, or manufacture of that country 
or instrumentality, or (ii) in the case of an article which consists 
in whole or in part of materials from another country or 
instrumentality, it has been substantially transformed into a new 
and different article of commerce with a name, character, or use 
distinct from that of the article or articles from which it was so 
transformed.

See also 19 CFR Sec.  177.22(a).
    In rendering advisory rulings and final determinations for 
purposes of U.S. government procurement, CBP applies the provisions 
of subpart B of Part 177 consistent with the Federal Acquisition 
Regulations. See 19 CFR Sec.  177.21. In this regard, CBP recognizes 
that the Federal Acquisition Regulations restrict the U.S. 
Government's purchase of products to U.S.-made or designated country 
end products for acquisitions subject to the TAA. See 48 CFR Sec.  
25.403(c)(1). The Federal Acquisition Regulations define ``U.S.-made 
end product'' as:
    . . . an article that is mined, produced, or manufactured in the 
United States or that is substantially transformed in the United 
States into a new and different article of commerce with a name, 
character, or use distinct from that of the article or articles from 
which it was transformed.

48 CFR 25.003.
    In order to determine whether a substantial transformation 
occurs when components of various origins are assembled into 
completed products, the determinative issue is the extent of 
operations performed and whether the parts lose their identity and 
become an integral part of the new article. See Belcrest Linens v. 
United States, 6 CIT 204 (1983), aff'd, 741 F.2d 1368 (Fed. Cir. 
1984). The country of origin of the item's components, extent of the 
processing that occurs within a country, and whether such processing 
renders a product with a new name, character, and use are primary 
considerations in such cases. Additionally, factors such as the 
resources expended on product design and development, extent and 
nature of post-assembly inspection and testing procedures, and the 
degree of skill required during the actual manufacturing process may 
be relevant when determining whether a

[[Page 79043]]

substantial transformation has occurred. No one factor is 
determinative.
    The Court of International Trade has also applied the ``essence 
test'' to determine whether the identity of an article is changed 
through assembly or processing. For example, in Uniroyal, Inc. v. 
United States, 3 CIT 220, 225, 542 F. Supp. 1026, 1030 (1982), aff'd 
702 F.2d 1022 (Fed. Cir. 1983), the court held that imported shoe 
uppers added to an outer sole in the United States were the ``very 
essence of the finished shoe'' and thus were not substantially 
transformed into a product of the United States. Similarly, in 
National Juice Products Association v. United States, 10 CIT 48, 61, 
628 F. Supp. 978, 991 (1986), the court held that imported orange 
juice concentrate ``imparts the essential character'' to the 
completed orange juice and thus was not substantially transformed 
into a product of the United States.
    In Headquarters Ruling (``HQ'') H270580, dated May 10, 2016, we 
considered whether a substantial transformation occurred when 
Johnson, the importer here, assembled ``G3 Dip'' and ``G3 Back 
Extension'' exercise machines in the United States. As in this case, 
Johnson proposed two different assembly scenarios. Under Scenario 
One, which applied to both machines, we held that although nearly 
all the parts were of Chinese origin, the extent of U.S. assembly 
operations was sufficiently complex and meaningful to result in a 
substantial transformation. Specifically, the assembly involved U.S. 
workers welding nine separate subassemblies with 49 seams for the 
``G3 Dip'' and three separate subassemblies with 22 seams for the 
``G3 Back Extension.'' In addition to the welding, U.S. workers also 
cleaned and degreased parts, ground down and painted the frame, and 
sprayed the frame with clear coat. The 200 to 500 parts that 
comprise the final products were then assembled in a process 
involving fastening hardware; adding rubber grips; capping off tube 
ends; positioning pulleys; adding weights, cables, or belts; and 
placing warning placards. We found that a substantial transformation 
had occurred because the assembly operations caused the individual 
parts to lose their separate identities and to become integral 
components of a product with a new name, character, and use.
    However, under Scenario Two in HQ H270580, which applied only to 
the ``G3 Dip,'' three of the nine subassemblies were imported from 
China as pre-assembled components. Under Uniroyal, 3 CIT 220, these 
critical components together imparted the ``very essence'' of the 
finished product. The processing in the United States thus did not 
result in a substantial transformation in Scenario Two. See also 
National Juice Prods. Ass'n, 10 CIT 48.
    Similarly, in HQ 733188, dated July 5, 1990, we held that no 
substantial transformation occurred when Venezuelan exercise benches 
and boards were assembled in the United States. The Venezuelan metal 
frames as imported were essentially complete, and the U.S. assembly 
consisted primarily of attaching the cushions and minor parts. 
Further, no machining was done in the United States and no 
specialized training, skill, or equipment was required to assemble 
the exercise equipment. CBP thus held that no substantial 
transformation occurred in the United States.
    Here, although nearly all the parts will be of Chinese origin, 
the extent of U.S. or Taiwanese assembly operations is sufficiently 
complex and meaningful to result in a substantial transformation in 
both scenarios. Unlike the exercise equipment at issue in HQ 733188, 
the treadmill parts will not be essentially complete when they are 
imported into either the United States or Taiwan for assembly. To 
the contrary, they will require substantial additional work to 
create a functional treadmill. Most importantly, U.S. or Taiwanese 
workers will need to weld a total of 27 seams to create the three 
major subassemblies (the treadmill base, the console frame, and the 
console mast) that comprise the finished treadmill. The additional 
assembly steps, which involve approximately 466 individual parts and 
``connecting, lining up, adjusting and bolting frames, tightening 
and torqueing frame bolts, attaching motors, installing power 
switches, wiring, pulleys and filters,'' are similar in scope and 
complexity to those that we found sufficient to effect a substantial 
transformation under Scenario One in HQ H270580. Under these 
circumstances, the Matrix[supreg] T3xe's country of origin for 
purposes of government procurement is the United States under 
Scenario One and Taiwan under Scenario Two.

Holding

    The finished treadmill's country of origin for purposes of 
government procurement is the United States under Scenario One and 
Taiwan under Scenario Two.
    Notice of this final determination will be given in the Federal 
Register, as required by 19 CFR Sec.  177.29. Any party-at-interest 
other than the party which requested this final determination may 
request, pursuant to 19 CFR Sec.  177.31, that CBP reexamine the 
matter anew and issue a new final determination. Pursuant to 19 CFR 
Sec.  177.30, any party-at-interest may, within 30 days of 
publication of the Federal Register Notice referenced above, seek 
judicial review of this final determination before the Court of 
International Trade.

Sincerely,

Alice A. Kipel,

Executive Director, Regulations & Rulings, Office of Trade.

[FR Doc. 2016-27159 Filed 11-9-16; 8:45 am]
 BILLING CODE 9111-14-P