TMI Blog2014 (10) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... rability of the international functions entered into by the assessee - It is obligatory on part of the assessee to maintain record and produce the same before the TPO to show that it has benchmarked the international transaction at ALP - This obligation has not been discharged by the assessee. Assessee is also not shown to be willing to pay any amount for such services, if it were, so provided by an independent enterprise or if the same would have been performed in house - The DRP is found to have considered these services as non-beneficial for the recipient and did not take it as chargeable services - The perusal of e-mails and other contemporaneous record only goes to reveal that incidental and passive association benefit has been provided by the associate enterprise - there could neither be any cost contribution or cost reimbursement nor payment for such services to the AE - The TPO has rightly adopted Nil value for benchmarking the arm's length price in respect of both these services. Treatment of outstanding receivables – Held that:- There is merit in the argument of revenue, the nature and heading of expenses as made by the assessee needs to be verified - Since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (DR) O R D E R PER R.P. TOLANI, J.M:: This is a set of 4 appeals by the assessee filed against the respective assessment orders of AO, passed under the directions of Dispute Resolution Panel (DRP) u/s 144C, pertaining to assessment years 2006-07 to 2009-10. Various grounds are raised involving TP and corporate issues. For the sake of convenience the grounds are tabulated in following abridged form: S. No. AY ITA No. Filed by Issues involved 1. 2006- 07 3861/Del/2010 Appellant Transfer pricing Adjustment on account of AMP expenditure. 2. 2007- 08 4924/Del/2011 Appellant Transfer pricing (i) Adjustment on account of AMP expenditure. (ii) Disallowance on account of intra-group Support services. (iii) Corporate tax issues. 3. 2008- 09 6382/Del/2012 Appellant Transfer pricing Adjustment on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ather than related to advertisement. 2.4. During the impugned assessment years, the Appellant entered into various international transactions with B L group companies from time to time including agreement dated December 16, 2002 placed on PB Pg. 157-163 of PB for AY 2006-07) with its Associated Enterprises ( AE ) for its own manufacturing operations and distribution of product manufactured by its group companies i.e., the AE and other subsidiaries. They do not pertain to trademark or brand enhancement activities. 2.5. This expenditure being purely sales related incurred wholly and exclusively for assesses business in India was claimed as routine revenue expenditure and accordingly the assessee s TP report is prepared keeping this view in mind. 2.6. Apropos TPO s objections thereon, they have been duly replied by the assessee, however, they have not been considered objectively, as TPO was determined to some how consider them as brand building expenses and make consequent TP adjustments, which are as under: Approach adopted by the Transfer Pricing Officer ( TPO ): 2.7. Ld. TPO held assessee s AMP expenditure to be excessive and benchmarked the same by comparing it with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench order in the case of LG Electronics India Ltd: 3.1. The AMP related issues are influenced by ITAT Special bench judgment in LG Electronics India Ltd vs. ACIT case (ITA NO. 5140/Del/2011). The Appellant was one of the intervener. Following two main propositions are adjudicated by the Special Bench: 1. Whether, on the facts and in circumstances of the case, the Assessing Officer was justified in making transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee? 2. Whether the Assessing Officer was justified in holding that the assessee should have earned a mark up from the Associated Enterprise in respect of AMP expenses alleged to have been incurred for and on behalf of the AE? 3.2. The Special Bench vide order dated January 23, 2013 laid down broad parameters in relation to the TP adjustment on account of AMP. The key principles emerging from the Hon ble Special Bench Ruling may be categorized into three categories as under: Category 1 Treatment of selling expenses such as trade discount, volume rebates etc, and; receipt of subsidy from the parent company in respect of AMP which have been decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables while determining the arm s length price of AMP and eventually leading to a higher TP adjustment. c) The Special Bench in its judgment (Para 18.3, 18.4, 18.5 and 18.6) have categorically expressed that the expenditure in connection with the sales has to be distinguished from the expenditure for promotion of sales and as such expenditure in connection with the sales cannot be covered within the expression of AMP. Reference is also made to the provisions of erstwhile section 37(3B) of the Act and the legal precedents in this regard to elucidate the scope of advertisement, publicity and sales promotion [an expression used in the erstwhile section 37(3B)], which is pari materia to AMP as is used in the present context. d) The Special Bench has categorically laid down a divider to distinguish expenses incurred with respect to promotion of sales and expenses incurred in connection with the sales. It has been elaborately appreciated by the Special Bench that the expenses in connection with sales are incurred post occurrence of sales and such expenses reduces the cost of goods sold and are directly linked to sales. Therefore, the same cannot be categorized as sales promotion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and not included commission. (Pg. 212 of PB for AY 2006-07 and Pg. 412 of PB for AY 2007-08) - In AY 2008-09, the TPO has included both channel discounts as well as commission (Pg. 419 of PB for AY 2008-09) - In AY 2009-10, the TPO has included commission and not trade discounts (Pg. 369 of PB for AY 2009-10) j) Without prejudice to above contentions, the computation of net AMP expenditure post reduction of trade/ channel discounts and commission has been tabulated as under: Particulars AY 2006-07 (INR) AY 2007-08 (INR) AY 2008-09 (INR) AY 2009-10 (INR) AMP including trade discount/ commission 20,90,47,349 25,67,02,188 17,60,95,512 12,95,73,460 Less: Trade Discount 12,52,63,219 16,20,44,325 12,08,47,641 - Less: Commission - - 10,11,787 14,47,646 Less: Other selling expenses rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keter that utilizes routine assets and undertakes normal business and economic risks. Terms of The appellant entered into agreement with its AE for its arrangement/ agreements between tax payer and AE own manufacturing operations and distribution of product manufactured by its group companies i.e. the AE and other subsidiaries and the same have been placed on record. Use and existence of brand name There is no explicit arrangement or agreement entered into by the appellant with its AEs for exclusive use of brand. All marketing strategy is India Specific although brand identity is global. The brand names are owned by the AEs. These brands have been in existence from much before the appellant started its operation in India. 3.6. In view of the above, It is pleaded that appropriate orders/ directions may be given to the AO/TPO to identify comparables for computation of the ALP of B L India in light of the factors suggested by the Special Bench for determination of cost/valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the TPO himself had accepted that the AMP expenses are payments to unrelated entities and has not, anywhere, incurred in relation to the business of the entity. The same should be included as operating expense while computing the margin of Appellant under TNMM. Without prejudice, if such AMP is considered as an international transaction, then the benchmarking should have been aggregated with the principal transaction of appellant i.e. import of finished products for distribution. 3. Cost/ value of transaction Bright line considered as a tool to determine cost of international transaction. (paras 15.7 15.10) Section 92C of the Act provides that arm s length price in relation to an international transaction shall be determined by any of the prescribed methods, being the most appropriate method, having regard to the nature or class of transaction or class of the associated enterprise or functions performed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant. The specific objections of the Appellant pertaining to the use of the comparables are placed at Pgs 61-62 of PB for AY 2006-07 Pgs. 87-89 of PB for AY 2007-08. - For AY 2008-09 and 2009-10, the TPO applied mark-up of Prime Lending Rate ( PLR ) plus an associated service charge and arrived at a mark-up of 15 percent (PLR of 12.5 percent plus 2.5 percent mark-up) and 15.27 percent (PLR of 12.77 percent plus 2.5 percent mark-up) respectively. It is respectfully submitted that the application of PLR to compute the mark-up is erroneous. The specific objections of the Appellant are placed at Pgs. 130-132 of PB for AY 2008-09 Pgs. 158-159 of PB for AY 2009-10. d) Without prejudice to other contentions, it is submitted that the TPO/AO be directed to follow a consistent approach in light of the decision of the Hon ble Special Bench. 4. Disallowance on account of payment made for availing Intra-group Support Services for AY 2007-08 2008-09 4.1. During AY 2007-08 AY 2008-09, the Appellant entered into a support services agreement dated April 1, 2006 with B L Hong Kong Ltd. ( B L HK ) (Pg 313 320 of PB for AY 2008-09). Thereafter, during AY 2008-09, the Appellant en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TNMM as benchmarking methodology stated that TNMM should be applied at transactional level and not entity level. Accordingly, the TPO applied CUP method for determining the ALP as Nil and not acknowledging the fact that the services were actually received by the Appellant and the same have benefitted the Appellant. 4.5. It is submitted that services availed from the AEs are utilized by the Appellant in its operations and serve as a business maintaining tool for the Appellant. Such services assist with strategic planning, management and monitoring of the Appellant s operations and provide material benefits to the Appellant in terms of revenue growth, cost savings, operational efficiency and sustainability. By incurring these expenses, the Appellant has access to network, expertise, skills, knowledge, information, etc., that is available within the B L Group. Further, the Appellant has not procured / purchased similar services from unrelated parties during these years and the respective jurisdiction from where the Appellant s AEs are operating earn an arm's-length markup on its service activities. 4.6. It is submitted that the industry in which Bausch and Lomb operate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be considered as the most appropriate method since, CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. However, no such data is available for comparability purposes. The TPO while proposing such an adjustment did not identify any unrelated comparable transactions for application of CUP and arbitrarily considered the ALP as Nil, thereby, proposing an adjustment amounting to the total value of reimbursements. It is respectfully submitted that the TPO erred in adopting such an arbitrary approach for making an adjustment per se which is not the intent of Chapter-X. Reliance is placed on the recent judgment of the Hon ble Delhi of Bench of the Tribunal in the case of Hero MotoCorp Limited (2013)156 TTJ 139 (Del) wherein, the applicant had paid model development fee and the TPO applied CUP for determining the ALP to be Nil. The DRP arbitrarily used 25 percent as the CUP. The Tribunal rejected the approach of the DRP/ TPO stating that it is TPO s responsibility to compute the appropriate ALP and the same ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO has erred in: (a) not appreciating the benefits received by the Appellant from the services rendered by AEs. (b) determining the ALP of the transaction as Nil. Accordingly, the said adjustment is not sustainable. 5. Re-characterizing delayed payments as unsecured loans to AE and imputing a notional interest on such alleged loan. Ground no. 12 13 for AY 2009-10 5.1. It is contended that ld. TPO held as under in this behalf: a) certain receivables, namely, amounts outstanding from the Appellant s AEs being B L Sing and B L HK, have not been received within the stipulated time and, therefore, treated the receivables as unsecured loans advanced to AEs. b) as a consequence of insertion of Explanation (i)(c) to Section 92B retrospectively receivables have been included in the definition of international transactions. c) interest rate was arrived at 15.77% by using PLR as the average lending rate of SBI plus 300 basis points, to account for the various risks involved (namely financial risk, credit risk, business risk and structural risk) and the same was considered as the CUP for making an adjustment of INR 3,12,643. 5.2. Adverting to the TPO adjustment q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We therefore hold that there was no justification to presume that there was a shift of profit to avoid tax in India. 5.5. With regards to the application of the CUP method by the TPO, it was submitted that as per the Act and the Rules, under the CUP method the procedure is to compare the price charged from AE with uncontrolled transaction i.e. non-AE. If the price charged from non-AE is comparable with AE, then no addition can be made. In the present case, the Appellant has not charged any interest from non-AE debtors in respect of delayed realization. The TPO erred in applying the CUP method as similar transactions were not entered into by the Appellant with third parties and the Appellant is not avoiding any tax by intentionally not charging any interest from AEs but charging it from non-AEs. As the case of non-charging of interest in the controlled transaction is comparable with that of non-charging from uncontrolled transactions, no transfer pricing adjustment can be made. 5.6. It is further submitted that the notional interest due on payables amounted to INR 41,61,327 whereas the notional interest on receivables amounted to INR 3,12,643 (as computed by the TPO). Details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following judicial pronouncements support the arguments of the Appellant: - Evonik Degussa India Private Limited vs ACIT [2013] 55 SOT 566 (Mum) 28. Even if the payments have been made by the AE beyond the normal credit period, there is no interest cost to the assessee. Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment .Moreover, the TP adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest relating to alleged delayed payment in collection of receivables from the AEs, is uncalled for on the facts of the present case and is, accordingly, deleted. - M/s Nimbus Communications Ltd. vs ACIT [2013] 145 ITD 582 (Mum- Trib.) Even assuming that the continuing debit balances of associated enterprises can be treated as 'international transactions' under section 92B, the right course of applying the CUP method, in the case of non-charging of interest on overdue balances, would have been by comparing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred in the ordinary course of business. 6.3. Ld AO filed the remand, reporting that, the Appellant had only submitted copies of vouchers, bills of advances given to various parties and no other details summarizing the nature of expenses were filed and did not provide any clarity as to whether the advances were given in ordinary course of business. Without giving cogent reasons it was reported that they were advanced for the long term benefit of the Appellant and that the list provided did not clarify that the expenditures were incurred in ordinary course of business. The expenditure having been incurred for protecting interest of customers was not the test for determination of revenue of capital expenditure. AO thus gave self contradictory and shifted from reasons to reason to arbitrarily hold it be not allowable. 6.4. Ld. DRP without considering the merits and offering cogent reasons summarily confirmed the AO s remand report holding that assessee has not been able to reasonably explain how these expenditure have been incurred in the ordinary course of business. Ld. DRP also went beyond even the observations of AO and held that it appeared that such expenditure was in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made under section 10(1) or not - Supreme Court in the case of CIT vs Mysore Sugar Co Ltd [1962] 46 ITR 649 (SC), wherein it was observed as under: To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for what was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses 6.6. The afore-mentioned view has been reiterated by the Jammu and Kashmir High Court in the case of Chenab Forest Co vs CIT [1974] 96 ITR 568 (J K), wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to M/s. Kanpur Boot House in its books of account, what else could be the proof with the assessee for its being unable to recover the same . The CIT(A) rightly recorded that the debt had become bad and not recoverable and it would be a futile exercise to take any action against the legal heirs of the deceased. In view of the discussion as made by the Division Bench of J K High Court and the Hon ble Supreme Court, as quoted above, that the advances made by the assessee in the case were certainly of a type which would be within the contemplation of the words laid out or expended wholly and exclusively for the purposes of the business . As no portion of the said advances could be stated to be loss of capital expenditure, but it being a plain case of business loss, it would certainly be allowable to be deducted under the provisions of section 37 of the Act - Minda HUF vs JCIT [2006] (285 ITR 88) (Delhi) - Jhalani and Company vs ACIT [2001] (77 ITD 44) (Delhi) 6.8. In view of these facts, circumstances and above judicial decisions, assesses impugned claim qua advances actually written off deserves be allowed as deduction under section 37(1) of the Act. 7. Ground No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses as outlined in schedule 14 of the final accounts for the AY 2006-07. C. Intra Group Services: 12. No evidence for rendering any services was furnished by assessee before lower authorities. Besides, TPO asked for a list of information which is not complied by assessee. The question that the set of alleged services is rendered by the AE or a group of AEs remains uncontroverted. It is to be seen that as to whom the assessee sells and through whom the distribution is done. Apropos stewardship services for controlling the entity by the parental group, the allowability of such expenses on the Indian entity to say the least, is to be considered. Further, TPO is within rights to determine ALP for the intra group services rendered per force to the assessee. The case laws cited by Ld AR are distinguishable on the facts as also on the underlying principles. Two such citations are reproduced below and the distinction is clear on both the facts as also the law: (i) EKL Appliances ([2012] 24 Taxmann.com 199 Delhi/ 345 ITR 241 Delhi) by Hon'ble Delhi High Court: The Hon'ble Court has rather upheld the authority of the TPO in para 22 of the order. Relevant quote is a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs. The TPO has not gone into the business allowability of Intra Group Services Expenses, only ALP of such item has been determined. (ii) Dresser Rand India P Ltd ( 47 SOT 423 [Mumbai] 2012): 10. In case the Assessing Officer comes to the conclusion that the assessee has indeed received the services from the AE the next question which we have to decide is as to what is the arm's length pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. Ld CIT(DR) further relies on the following cases: (i) Knorr Bremse India P Limited (ITA no. 5097/Del/2011) Asstt. Yr: 2007-08 Following international transactions of the appellant: i. Payment of management fee; ii. Payment of professional fee; and iii. Payment of SAP implementation fee. 5.10. In the case of Deloitte Consulting India Pvt. Ltd. Vs. DCIT in ITA no. 579, 1272 1273/Mum/2011 others dated 30-3-2012 the Mumbai Bench of the Tribunal has expressed its opinion in following terms 39. On the issue as to whether the TPO is empowered to determine the ALP at nil , we find that the Bangalore Bench of the Tribunal in Gemplus India Pvt. Ltd. (supra), held that the assessee has to establish before the TPO that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the TPO is justified in making an adjustment under ALOP. 40. In the case in hand, the TPO ha determined the ALP at nil keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses . Earlier to this they have observed that Revenue cannot disallow any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in view of the Revenue the expenditure was unremunerative. Looking into observations of their Lordships, it has to be held that reasonableness of an expenditure has not been excluded from determination. 5.15. The principle stated in MC Ericsion Vs. ACIT (ITA no. 5871/Del/11 dated 8-6-2012) is on the issue of commercial expediency. Though it does not need any deliberation, the applicability of principle of arm's length test of international transactions has not been done away with. The expenditure incurred in an international transaction has necessarily to pass the test of ALP. 5.16. Further more, it has been contended that the expenditure which is the subject matter of adjustments by the TPO ought to have been allowed in the same manner as the expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to have questioned the commercial expediency of such transactions entered by the appellant. The I.T. rules contain exhaustive detail regarding nature of information and documents which are required to be maintained by the assessee. Rule 10D(1) of the I.T. Rules, 1962 also mandates the maintainability of record of uncontrolled transactions to be taken into account in analysing the comparability of the international functions entered into by the assessee. It, therefore, is obligatory on part of the appellant to maintain such record and produce the same before the TPO to show that it has benchmarked the international transaction at ALP. This obligation, however, has not been discharged by the assessee. 9.3. The appellant in the present case is also not shown to be willing to pay any amount for such services, if it were, so provided by an independent enterprise or if the same would have been performed in house. The DRP is found to have considered these services as non-beneficial for the recipient and did not take it as chargeable services. The perusal of e-mails and other contemporaneous record only goes to reveal that incidental and passive association benefit has been provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at page 10, in sub para (j), above. These figures of AMP expenses as tabulated should be adopted and no further verification of the expenses should be directed to be carried by TPO in as much as it will amount to subjecting assessee again to rigorous exercise, without there being any fault attributable to it. In sum and substance, ld. Counsel contends that for working of adjustment attributable to brand building in terms of the Special Bench judgment is reflected by the figures mentioned in the above table. Thereafter suitable comparables may be taken and based on objective data the mark up may be applied and the adjustment should be worked out. Thus this exercise does not further verification of expenses. 16.3. Per contra, ld. CIT (DR) contends that the concept of bright line test is a recognized concept to determine the cost relevant to the international transactions. The Special Bench ruling in the case of L.G. Electronics though has not especially dealt with the issue of bright line concept , how4ever, the methodologies as provided by ECD and UN Model guidelines are implicitly endorsed and factored in by the Special Bench for undertaking an appropriate comparability an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof, we are inclined to set aside the grounds raised by the assessee in this behalf back to the file of TPO to decide the same afresh after giving the assessee adequate opportunity of being heard. Assessee s ground on this issue for all the assessment years in question stands allowed for statistical purposes. 17. Disallowance of Intra Group Support Services ( A.Y. 2007-08 2008- 09): 17.1. Before TPO, assessee furnished a list of services claimed to be rendered by the group concerns for which the amount in question was paid as intra group services. The TPO has given a categorical finding that assessee has not provided any evidence to substantiate the claim of receiving any service. Assessee s objection is to the effect that the benefit test is not a method prescribed under the realm of T.P. proceedings. DRP in para 6.7.1 6.7.2 of its order for A.Y. 2007-08 has upheld the order of TPO on following lines: (i) Services claimed to have been rendered were neither identified nor proved by any contemporaneous documentary evidence. (ii) Details of tangible and direct benefit derived by the assessee has not been furnished. (iii) No information has been provided as to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Lintas India P. Ltd. (supra) Mastek Ltd. (supra). 18.3. In view of above facts, respectfully following these judicial precedents we are of the view that the adjustment in relation to notional interest on outstanding receivables cannot be made in the case of the assessee. This ground of the assessee is allowed. 19. Corporate addition (A.Y. 2007-08): 19.1. The sole issue relates to disallowance of advances written off, which was disallowed by AO holding that they were given in the ordinary course of business and were revenue in nature, besides conditions of Sec. 36(2) read with sec. 36(1)(vii) were not satisfied. Before DRP assessee filed additional evidence also on which a remand report was called from AO. In the remand proceedings assessee submitted before the AO, that advances given to various parties were in nature of expenses incurred towards marketing and sales promotion activities, sponsorship of events, conferences, travel hotel stay, employee salary advance etc. and were necessarily incurred in the ordinary course of business. Besides it also filed details of nature of expenses for which the advances were given to prove that the expenses were of reven ..... X X X X Extracts X X X X X X X X Extracts X X X X
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