ITW SIGNODE INDIA LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2007-LL-0323-10]

Citation 2007-LL-0323-10
Appellant Name ITW SIGNODE INDIA LTD.
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 23/03/2007
Assessment Year 1996-97 & 1997-98
Judgment View Judgment
Keyword Tags deferred revenue expenditure • travelling and conveyance • commencement of business • inter-corporate deposit • industrial undertaking • supply of raw material • commercial expediency • new line of business • marketing activities • new industrial unit • outstanding balance • computing deduction • feasibility report • license agreement • accrued interest • actual liability • legal obligation • notional benefit • notional income • working capital • sister concern • project report • revenue nature • credit balance • capital nature
Bot Summary: The learned counsel for the assessee submitted that the assessee has a marketing division which as part of its ongoing activity explores markets for new products, new dealers, new branch etc. The contention of the assessee before the CIT(A) that it has set up new units was in this context and not in the context in which it is envisaged in s. 35D. Therefore, there is no gainsaying that the assessee has put up new industrial unit and hence the expenditure in connection therewith should be amortised under s. 35D. In the two Tribunal decisions, the assessee had launched altogether a new product and had incurred huge advertisement expenditure. The submission of the learned counsel was that Glen View was the subsidiary of the assessee and that the assessee was dependent on it for its business as it had to supply straps also to its customers along with packaging machinery. The assessee may have leased factory and plant to Glen View but that fact does not have any bearing on the claim of the assessee. The financial position of the Glen View must not have been healthy, and hence, had the assessee not advanced any money to Glen View, the assessee would have been the sufferer for want of supplies of straps. The contention of the assessee was that since the notional benefits obtained by the assessee in earlier years were offered for taxation in those years, the unused balances which are no longer required are written off and hence the same be allowed as deduction. With regard to the observation of the CIT(A) that the AO has taken the same amount of interest as was taken by the assessee, we may only add that if the assessee has taken gross amount on some mistaken belief, it should not be prevented from taking t h e net amount because afterall correct income has to be determined in accordance with law.


These two appeals by assessee are directed against two separate orders of learned CIT(A) dt. 8th March, 2002 and 22nd March, 2002 for asst. yrs. 1996-97 and 1997-98 respectively. For sake of convenience, two appeals are disposed of together by this combined order. appeal for asst. yr. 1997-98 is taken up first for consideration. ITA No. 560/Hyd/2002 (asst. yr. 1996-97): only ground raised in this appeal is against disallowance of Rs. 1,06,43,227. assessee company is engaged in manufacture of various packaging systems catering to requirements of various industrial units and other traders in India. It has entered into manufacturing license agreement with Signode Corporation, USA. It had declared total income of Rs. 60,44,800 for year under consideration. In course of assessment proceedings, it was noticed that assessee had claimed deduction of Rs. 1,06,43,227 as market development and analysis group expenses in computation of income. In books of account this expenditure was treated as deferred revenue expenditure and was written off over period of four years. Considering nature of expenditure, AO invoked provisions of s. 35D of Act. AO was of view that this expenditure was always treated as deferred revenue expenditure in books of account because its benefits were long-term and of enduring nature. Therefore, to debit entire expenditure in one year would give distorted picture of profits of company. main contention of assessee was that entire expenditure was claimed as deductible on ground that it was wholly and exclusively laid out for purpose of business. It was also emphasized that there was common management, unity of control interconnection, interlacing, interdependence and dovetailing of one activity into other. It was stated that no new business was set up and expenditure was for ongoing activities of assessee. AO observed that s. 35D was applicable to going concern also and not necessarily to new concern for conducting market survey prior to commencement of business. He was of definite opinion that expenditure incurred was on market survey and hence s. 35D was applicable. Accordingly, he computed deduction as per said provision which amounted to Rs. 17,05,103. Elaborate submissions were made before CIT(A) over and above those made before AO. It was stated that entire expenditure comprised of expenses like salary and wages, travelling and conveyance, vehicles running and maintenance, miscellaneous office expenses etc. It was stated that AO had disallowed expenditure under erroneous belief that assessee had opened new line of business/product. However, it was categorically stated that no new business has been set up during relevant previous year as alleged b y AO. At same time, in later part of its submissions, it was stated that assessee did set up new units for manufacturing new packaging material and improved existing process of manufacturing some of products already been manufactured by it. CIT(A) took note of this contradictory stand taken by assessee and concurring with view taken by AO, confirmed disallowance. Before us, learned counsel for assessee submitted that assessee has marketing division which as part of its ongoing activity explores markets for new products, new dealers, new branch etc. Referring to observations of AO in para 6.5 of his order, it was stated that it was factually wrong to mention that assessee had opened new line of business and that this new unit was yet to commence commercial production. Our attention was drawn to p. 88 of paper book in which information regarding goods manufactured by assessee was given for year under consideration as well as for immediate preceding year. It was specifically pointed out that by comparing information of two years, it was evident that no new product was added to list of products already being manufactured by assessee. If at all there was new product, it was Edge Board production of which was only 70,000 meters which was too insignificant. Taking us through details of expenses, it was submitted that all expenses were in connection with existing products and therefore were of revenue nature. Referring to s. 35D, it was argued that said provision contemplates substantial expansion. In case of assessee there was no preparation either of any feasibility report or project report. It was submitted that AO had specifically picked up sub-cl. (iii) of cl. (a) of sub-s. (2) of s. 35D which referred to expenses incurred for conducting market survey or any other survey without considering facts in case of assessee. It was also pointed out that merely because it was treated as deferred revenue expenditure in books of account, same does not become capital expenditure. Reliance was placed on decision of Hyderabad Bench of Tribunal in case of Amar Raja Batteries Ltd. vs. Asstt. CIT (2004) 85 TTJ (Hyd) 20: (2004) 91 ITD 280 (Hyd) and also on decision of Delhi Bench of Tribunal in case of Jt. CIT vs. Modi Olivetti Ltd. (2004) 84 TTJ 1038 (Del). Alternatively, it was contended that if s. 35D was held to be applicable, then at most expenses attributable to manufacture of Edge Board may be disallowed which amounted to Rs. 13,57,947. learned Departmental Representative submitted that onus was on assessee to prove that expenditure was not incurred for setting up new unit. In this connection, he specifically referred to observations of CIT(A) in para 17 of his order where finding was given that assessee did set up new units for manufacturing new packaging material/products. We have duly considered rival contentions and material on record. T h e Revenue has invoked provisions of s. 35D and has made disallowance on basis of provisions of s. 35D(2)(a)(iii) of Act. said sub-cl. (iii) refers to expenditure incurred for conducting market survey or any other survey for business of assessee. Sub-s. (2)(a) in which this sub-clause is contained is with reference to expenditure referred to in sub-s. (1) of s. 35D. Sec. 35D(1) provides for spread over of expenses over ten assessment years with regard to certain preliminary expenses. For such amortization, provision contemplates either of two situations. first situation is where expenditure is incurred before commencement of business. In present case, we are not concerned with this situation. second situation is where assessee incurs expenditure after commencement of business in connection with extension of its industrial undertaking or in connection with setting up of new industrial unit. Since assessee has commenced its business long back and has incurred impugned expenditure after commencement of its business, we have to appreciate facts in light of this situation. This second situation further visualises either of two situations. One is, expenditure is incurred in visualises either of two situations. One is, expenditure is incurred in connection with extension of its industrial undertaking. Let us examine whether assessee s case falls within this situation. expression used is "extension" and not "expansion". former connotes that assessee has extended its operations from present activity to another activity. On other hand, latter indicates that assessee has merely expanded its present operations. expansion is generally meant to be expansion of its present installed capacities. capacity may be expanded either at same location or at different location. But legislature has not used word "expansion" and that is with purpose. If there is merely expansion, then it may not be necessary for assessee to incur type of expenditure envisaged in s. 35D. On other hand, if there is extension or where altogether new industrial unit is set up, such extension or setting up of new unit may be preceded with preparation of feasibility report or project report or conducting market survey and so on. These preliminary expenses are envisaged in s. 35D for reason that extension or setting up of new unit presupposes that assessee is entering into altogether new line of activity or is setting up undertaking which is independent of present undertaking. With this background, let us consider facts of present case. assessee company is in manufacture of state of art packaging systems. It manufactures several products like steel strapping, sealing tools, industrial packaging machines, stretch wrapping and packing systems, paper conversion products etc. It is not unknown to anyone that market gets flooded with new innovative products everyday. It is also not uncommon that manufacturers of such products always try to package them in sophisticated way to attract customers. Secondly, automation in every activity is order of day and hence new machines are also being evolved to hasten process of packaging with efficiency and efficacy. assessee therefore has to keep on innovating new products and improving existing products to cope up with expanding market and consumerism. For this it requires dedicated department which keeps on conducting surveys of various types. It is in connection with this department that assessee has incurred various expenses. As mentioned by assessee, this department has been treated as separate cost centre and hence its expenses are shown separately. To cope up with its expanding activities and production, assessee has to install new plants or new machinery. Installing such new plants or machinery is sometimes loosely referred to as setting up new unit. contention of assessee before CIT(A) that it has set up new units was in this context and not in context in which it is envisaged in s. 35D. Therefore, there is no gainsaying that assessee has put up new industrial unit and hence expenditure in connection therewith should be amortised under s. 35D. In two Tribunal decisions, assessee had launched altogether new product and had incurred huge advertisement expenditure. In both cases, expenditure was treated as deferred revenue expenditure by assessee in its books of account. assessee had claimed entire expenditure in return of income as revenue expenditure. Tribunal allowed entire expenditure by observing that by its very nature, deferred revenue expenditure presupposed that expenditure was in revenue field. It was also observed that though expenses may have enduring benefit, no estimate can be made about period for which assessee may be benefited. Therefore, on these grounds, Tribunal allowed expenditure. assessee s case in present appeal is on much better footing insofar as that assessee has not launched any new product worth its name. production of Edge Board which is new product introduced during year is too insignificant to be considered. Thus, considering overall facts of case, we do not see any reason to apply provisions of s. 35D. AO is directed to allow full deduction of expenditure as claimed by assessee. ITA No. 566/Hyd/2002 (asst. yr. 1997-98): first ground in this appeal is against Rs. 1,00,00,000 being amount written off in respect of inter-corporate deposit (ICD) due from Shaw Wallace & Company Ltd. (Shaw Wallace for short). It was noticed that assessee had placed Rs. 1 crore as ICD with Shaw Wallace. On maturity, Shaw Wallace could not repay amount and assessee filed proceedings for recovery in Calcutta High Court. In opinion of assessee since amount was irrecoverable, it wrote off amount in books of account and claimed deduction thereof as bad debt. AO was of view that this amount was never taken into account in computing income at any point of time before such write off. Secondly, it was more in nature of investment and hence had such write off. Secondly, it was more in nature of investment and hence had said amount been recovered, assessee would not have credited it to its P&L a/c. Thirdly, according to AO, it was capital loss and not debt of revenue nature. Thus, according to AO, since conditions for claiming deduction under s. 36(1)(vii) were not fulfilled, he disallowed claim of assessee. Almost same contentions were made before CIT(A). In addition, it was contended that alternatively same may be allowed as trading loss under s. 28 of Act. It was also stated that during previous year relevant to asst. yr. 2001-02, assessee had received Rs, 1,85,56,082 from Shaw Wallace in full and final settlement of amount outstanding. entire amount was credited to P&L a/c. argument was that if addition is sustained in this year, same should be reduced from income of asst. yr. 2001-02. On basis of this submission, CIT(A) concluded that when entire amount along with interest has been recovered in subsequent year, same is wrongly claimed as bad debt in year under consideration. Thus, concurring with stand taken by AO, CIT(A) confirmed addition by observing that debt was not of revenue nature and that it had been taken into account in computing income of earlier previous year. After narrating facts as mentioned above, learned counsel for assessee submitted that after one rollover for further period of ninety days, Shaw Wallace had issued cheque to assessee which had bounced. Therefore, debt became due on 9th July, 1995 because it was legally recoverable. As regards Revenue s contention that it was never taken into account for computing t h e income of any earlier previous year, learned counsel referred to wordings of s. 36(1)(vii) of Act. In particular, he drew our attention to expression "...any bad debt or part thereof " and laid emphasis on words "part thereof". argument was that interest of about Rs. 21 lacs had accrued on said ICD which also assessee could not recover. Therefore, accrued interest became part of debt due which was offered for taxation. When once it was treated as income, it being part of entire debt due, condition of s. 36(1)(vii) stood fulfilled. Alternatively, it was contended that it was loss incidental to business and hence was allowable under ss. 28 and 29 of Act. For his propositions, learned counsel relied on judgment of Calcutta High Court in case of Turner Morrison & Co. Ltd. vs. CIT (2001) 165 CTR (Cal) 451: (2000) 245 ITR 724 (Cal) and on decision of Bangalore Bench of Tribunal in case of K. Raheja Development Corpn. vs. Asstt. CIT (2005) 2 SOT 744 (Bang). learned Departmental Representative submitted that nature of debt and other facts in present case are different from cited cases and hence those cases have no relevance here. It was submitted that there was no business relationship between assessee and Shaw Wallace but merely surplus funds were parked by assessee with Shaw Wallace. He placed full reliance on conclusion drawn by CIT(A). We have duly considered rival contentions and material on record. T h e facts are not in dispute. Recently, Supreme Court had occasion to explain meaning of expression "commercial expediency". It was explained that it is term of wide import and includes such expenditure for which there may not be any legal obligation but is incurred for purpose of business. It referred to its earlier judgment in case of Madhav Prasad Jatia vs. CIT (1979) 10 CTR (SC) 375: (1979) 118 ITR 200 (SC) where borrowed amount was donated to college with view to commemorate memory of assessee s deceased husband after whom college was to be named. It was held that if borrowed amount was donated for some sentimental or personal reasons then it could not be said that it was for commercial expediency. In present case, it is not case of Department that ICD placed with Shaw Wallace was for some personal reasons. Inter-corporate deposits are quite common and corporate houses accommodate each other on short-term basis on grounds of commercial expediency. Today, if assessee accommodated Shaw Wallace, tomorrow, it could be Shaw Wallace accommodating assessee. Moreover, it is also not uncommon that at certain points of time, companies may have surplus funds awaiting fruitful deployment. Pending such deployment, they park their funds to earn interest. Earning of interest on surplus funds is also on grounds of commercial expediency as such income would ultimately augment working capital of assessee. Therefore, placing of ICDs is in usual course of business and company doing so need not be in ICDs is in usual course of business and company doing so need not be in money lending business. If placing of ICDs is in normal course of business, loss arising therefrom cannot be anything else but arising in usual course of business. It was judgment of assessee that debt due from Shaw Wallace has become irrecoverable. It was not without any reason that assessee judged debt to have become bad and irrecoverable. ICD was initially for 90 days. At end of this period, it was rolled over again for another 90 days. At end of second period of 90 days, Shaw Wallace issued cheque which it could not honour. If these are not good enough reasons to consider debt as irrecoverable, what else is required. It is further interesting to note that interest of Rs. 21,05,278 accrued on this very ICD is also claimed as bad debt and AO has allowed same. Therefore, considering facts of case, claim of assessee for deduction of Rs. 1 crore is allowed. Second ground in appeal is against addition of Rs. 28,02,328 being interest payable by Shaw Wallace in respect of aforesaid ICD. contention of learned counsel was that when principal was written off, interest thereon was quite notional and illusory. On one hand, AO was allowing interest as bad debt and at same time he was adding it as notional income on same ICD. contentions of learned Departmental Representative were same as they were in respect of first ground above. For reasons mentioned by us in ground No. 1, we delete addition of Rs. 28,02,328. Third ground in appeal is against disallowance of Rs. 1,26,95,765 as bad debt due from Glen View Plastic Systems (P) Ltd. (Glen View for short). assessee had advanced sum of Rs. 3,12,31,754 to Glen View which is its sister concern over period of five years. amount was purportedly shown to have been given towards advance for material supply. assessee obtains its requirement of PP Strap of various sizes from Glen View. However, AO made observation that supply was not commensurate with advances given. During year under consideration, assessee came to conclusion that Glen View may not be in position to supply material and hence wrote off advances standing to debit of Glen View. AO was of view that existence of Glen View was entirely dependent on assessee as latter had given on lease to it factory and plant and had also provided funds to it. AO was also of view that advances given were of capital nature and that to write off these advances was premeditated and make-belief arrangement. Therefore, again, AO referred to provisions of s. 36(1)(vii) of Act and observed that amount given to Glen View never formed part of assessee s income in earlier years. Accordingly, he rejected claim of assessee. CIT(A) confirmed disallowance for same reasons. submission of learned counsel was that Glen View was subsidiary of assessee and that assessee was dependent on it for its business as it had to supply straps also to its customers along with packaging machinery. total amount which was written off was inclusive of not only advances but also lease rentals for machinery which were leased by assessee and commission for carrying out marketing activities on its behalf. Therefore, reiterating arguments given in connection with ground No. 1, it was stated that part of debt comprising of lease rentals and commission did form part of income of assessee in earlier years and hence it satisfied condition laid down in s. 36(1)(vii) of Act. contention of learned Departmental Representative was that advance given for supply of raw material cannot be considered as debt and all more bad debt. submission that commission and lease rent were also included in outstanding balance was new fact according to learned Departmental Representative which was never put before lower authorities. Therefore, it was pleaded that addition was justified. We have duly considered rival contentions and material on record. O f course, fact that outstanding balance due from Glen View includes commission and lease rent does not find mention in order of AO as well as CIT(A). However, papers placed in paper book at pp. 65 to 70 do reveal this fact and these papers were certainly before lower authorities as certificate appended to paper book indicates. Therefore, it cannot be said to be new fact brought on record. assessee may have leased factory and plant to Glen View but that fact does not have any bearing on claim of assessee. assessee is equally dependent on Glen View for its business. financial position of Glen View must not have been healthy, and hence, had assessee not advanced any money to Glen View, assessee would have been sufferer for want of supplies of straps. Thus, to serve needs of its own business, assessee had to keep on pumping funds to Glen View. This is nothing but pure commercial expediency which has been discussed in detail in respect of ground No. 1. In fact, case of assessee here is much ker than what it was in ground No. 1. Further, balance does include lease rent and commission due from Glen View which was offered for taxation in earlier years. Therefore, condition laid down in s. 36(1)(vii) is also fulfilled. Accordingly, in light of this discussion and in light of reasons given in respect of ground No. 1, we delete disallowance of Rs. 1,26,95,765. Fourth ground in appeal is against disallowance of Rs. 69,16,756 s bad debt on account of unrealized benefit under advance license scheme. T h e assessee was entitled to advance licenses for import of raw material pursuant to import and export policy of Government of India. Against these licenses assessee could import raw material free of customs duty. At same time, it was required to fulfill its export obligations. So far as accounting aspect is concerned, on receipt of advance license, assessee used to credit its P&L a/c with value of license, it being notional benefit obtained by it. As and when raw material was imported, customs duty payable on it was adjusted against said notional benefit. Subsequently, due to change in duty structure of items being imported by assessee, benefit obtained by way of advance license was no longer required. Accordingly, unused balances on account of these advance licenses were written during year under consideration. contention of assessee was that since notional benefits obtained by assessee in earlier years were offered for taxation in those years, unused balances which are no longer required are written off and hence same be allowed as deduction. However, AO observed that so-called notional benefit offered for taxation in earlier years was eyewash insofar as that assessee used to debit P&L a/c also at same time by way of customs duty anticipated to be payable by it in future. Thus, in effect, nothing was offered for taxation in earlier years as claimed by assessee. He also observed that spending in sense of paying out of money is primary meaning of expenditure. In instant case, there is no actual paying out or no actual liability incurred, but everything being notional, no deduction can be allowed. Accordingly, claim of Rs. 69,16,756 was disallowed. CIT(A) confirmed disallowance on basis of reasons given by AO in his order. learned counsel explained system of advance licenses and submitted that assessee used to account for benefit obtained by it notionally. balance lying to credit of license benefit account was adjusted whenever raw material was imported. Subsequently, on account of change in duty structure, it became more prudent to obtain raw material locally rather than importing it. Therefore, unused balance lying in license benefit account has been written off. With regard to AO s contention that if at all it was debit, it was not due from anyone; it was contended that in way, it can be said to be due from Government. With regard to AO s contention that it was not expenditure, it was argued that it was benefit which was credited in books notionally but was no longer receivable now and hence, its write off i s justified and should be allowed. learned Departmental Representative submitted that this issue may be set aside to verify whether notional benefit was offered for tax in earlier years or not. On due consideration of matter, we do not see any legal or accounting infirmity in write off effected by assessee. AO is not right in observing that assessee used to debit P&L a/c with anticipated amount of duty payable by it in future. That cannot be case and in fact is not case also. amount credited to license benefit account will get adjusted only on actual import of raw material by amount of duty which assessee saved on account of advance license. Thus, though entries are notional in sense that there is in reality no inflow or outflow of money, yet it is benefit derived by assessee and hence same was rightly credited to P&L a/c. Similarly, benefit so derived and credited in books got adjusted either on import of raw material or in event of changes in duty structure. It can be seen that unless these transactions, though notional, are recorded, true profit or loss of assessee cannot be determined. recorded, true profit or loss of assessee cannot be determined. benefit obtained in earlier years which is lying as credit balance in license benefit account has been written off by assessee as it is no longer required. Again, if unrequired balance is allowed to remain in books, accounts of assessee will not reflect true and fair view of state of affairs of business. Thus, in whatever way it may be described, be it bad debt or benefit no longer required or balance due from Government, fact remains that it is legitimate write off effected by assessee and hence we direct AO to delete addition. We do not accept suggestion of learned Departmental Representative to set aside issue for reason mentioned by him because it is not disputed even by AO himself that notional benefit derived by assessee was in fact credited to P&L a/c. Fifth ground in appeal is against excluding from business profits 90 per cent of gross interest and not net interest for purpose of computing deduction under s. 80HHC of Act. While computing deduction under s. 80HHC, AO reduced from business profits 90 per cent of interest amounting to Rs. 41,75,358. Before CIT(A), it was contended by assessee that AO had taken 90 per cent of interest recovered and not 90 per cent of net interest income. CIT(A) observed that assessee itself had taken 90 per cent of Rs. 41,75,358 and same figure had been taken by AO. Therefore, he held that there was no discrepancy in computation made by AO. learned counsel has relied on judgment of Delhi High Court in case of CIT vs. Shri Ram Honda Power Equip (2007) 207 CTR (Del) 689: (2007)-TIOL- 38-HC-DEL-IT, dt. 12th Jan., 2007. There have been differences of opinion on this issue not only amongst some of Benches of Tribunal but also amongst some of High Courts. However, by and large, most of Benches have been following decision of Special Bench in case of Lalsons Enterprises vs. Dy. CIT (2004) 82 TTJ (Del)(SB) 1048: (2004) 89 ITD 25 (Del)(SB). said decision of Special Bench has since been upheld by Delhi High Court in case of Shri Ram Honda (supra) holding that 90 per cent of net interest should be excluded from business profits under cl. (baa) of Explanation to s. 80HHC. Of course, we are conscious of two contrary judgments, one by Madras High Court in CIT vs. Chinnapandi (2006) 201 C T R (Mad) 13: (2006) 282 ITR 389 (Mad) and other by Punjab & Haryana High Court in case of Rani Paliwal vs. CIT (2003) 185 CTR (P&H) 333: (2004) 268 ITR 220 (P&H). Both these judgments have been considered at length by Delhi High Court. Considering all judgments, we are inclined to follow judgment of Delhi High Court as it is well established that between two views expressed, one which is favourable to assessee should be accepted. Therefore, respectfully following same we direct AO to exclude 90 per cent of net interest from business profits. With regard to observation of CIT(A) that AO has taken same amount of interest as was taken by assessee, we may only add that if assessee has taken gross amount on some mistaken belief, it should not be prevented from taking t h e net amount because afterall correct income has to be determined in accordance with law. Therefore, this ground of assessee is upheld. Last ground in appeal relates to disallowance in respect of expenditure on food and beverages and expenses in connection with maintenance of transit house. In view of judgment of Supreme Court in case of Britannia Industries Limited vs. CIT (2005) 198 CTR (SC) 313: (2005) 278 ITR 546 (SC), learned counsel fairly conceded that this issue has to be decided in favour of Department. Accordingly, assessee s ground is rejected. In result, appeal of assessee for asst. year 1996-97 (ITA No. 560/Hyd/2002) is allowed and one for asst. year 1997-98 (ITA No. 566/Hyd/2002) is partly allowed. *** ITW SIGNODE INDIA LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
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