TMI Blog2019 (2) TMI 1414X X X X Extracts X X X X X X X X Extracts X X X X ..... ow on the submission of the assessee. Therefore, we are of the view that the matter needs to be adjudicated afresh by the Assessing Officer after giving a reasonable opportunity of hearing to the assessee. Accordingly, we set aside the issue to the file of AO with the direction to allow the brought forward losses/unabsorbed depreciation of the earlier year against the current year income as well as to carry forward such losses/unabsorbed depreciation to the succeeding assessment years as per the provisions of law. Hence, the ground of appeal of the assessee is allowed for statistical purposes. Prior period income under the provisions of section 41 - HELD THAT:- We find that income of the assessee is being assessed at entity level. All the expenditure debited under different heads cannot be decided qua a specific receipt. Once the assessee has been offering income of prior period as an entity, then its prior period expenditure cannot be disallowed simply by observing that it is not ascertainable whether this expenditure was incurred for earning a particular receipts offered under the head prior period income. If an assessee is offering prior period income, then the expenditure wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal by turnover criteria as directed above for the selection of comparable companies. Therefore we refrain ourselves from adjudicating the issue of super profit as indicated by the assessee. Thus the grounds of appeal of the assessee are allowed. Not allowing deduction u/s.10B on account of foreign exchange gain - HELD THAT:- To de decided in favour of assessee[2008 (12) TMI 296 - ITAT AHMEDABAD] the assessee would be entitled to the deduction under section 10B with regard to exchange gain only which is the gain on the day of deposit of US$ in the EEFC Account. Therefore, the assessee should be granted deduction under section 10B of the Act with regard to exchange gain. Not granting deduction u/s.10B of the Act on the revised gross total income - HELD THAT:- We hold that the deduction u/s.10B of the Act will be enhanced by the disallowances made by the Assessing Officer in the assessment proceedings. Thus, we direct accordingly. Hence, the ground of appeal is allowed. - ITA No.1909/Ahd/2015 And ITA No.1947/Ahd/2015 - - - Dated:- 1-1-2019 - SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND MS. MADHUMITA ROY, JUDICIAL MEMBER For The Assessee : Shri Tushar Hemani And Shri Parimal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase in confirming the action of AO in not allowing MAT credit of ₹ 17,26,221/- on tax liability calculated on book profit u/s.115JB of the Act. 9. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of AO in adding ₹ 2,33,75,788/- towards adjustment in Arm s Length Price without there being any jurisdiction as well as legal and factual basis for the same. 10. The learned CIT(A) has erred in law and on the facts of the case in not following the order of his predecessor for AYs 2006- 07 2007-08 involving identical issue in the case of the very appellant. Ld. CIT(A) further erred in not giving a single reason as to how the orders of earlier years are not required to be following. This action of ld. CIT(A) is in gross violation of the hierarchical judicial system and the settled legal principles. 11. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of AO in selecting comparable companies whose turnover were not within the comparable range of the appellant. Ld. CIT(A) further erred in not adopting range of 50% in the figure of turnover as held in A.Y. 2006-07 2007-08 in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer of ₹ 38,565/- on account of late payment of employees contribution towards superannuation fund u/s.36(1)(va) of the Act. 4. Briefly stated facts are that the assessee in the present case is a limited company and engaged in the business of manufacturing of pharmaceuticals and fine chemicals. The assessee in the year under consideration has deposited employees contribution towards PF and ESI, etc., after the due date as prescribed under the relevant Act. Therefore, the Assessing Officer disallowed the same under the provisions of section 36(1)(va) of the Act and added to the total income of the assessee. 5. The aggrieved assessee preferred an appeal before the Ld. CIT(A) who has confirmed the order of the Assessing Officer. 6. Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. The ld. AR before us conceded the fact that the issue is covered against the assessee by the Hon ble Gujarat High Court in the case of CIT vs. GSTRC reported in 41 taxmann.com 100. However, the ld. AR before us further submitted that the due date for the depositing the amount of employees contribution towards PF/ESI is to be seen from the relevant month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restored to the file of AO for fresh adjudication regarding the above. On the other hand, ld DR relied on the order of authorities below. 6.1 We have heard the rival contentions and perused the materials available on record. In the instant case, the assessee has delayed in the payment of employee s contribution of PF/ ESI as specified under the relevant Act. Therefore, the disallowance was made by the AO u/s 36(1)(va) r.w.s. 2(24)(x) of the Act. The Ld CIT-A subsequently confirmed the view taken by the AO. The ld. AR before us has not challenged the proposition laid down by the Hon ble Gujarat High Court in the case of CIT Vs. GSRTC (Supra), wherein it was held as under: In view of the above and for the reasons stated above, and considering section 36(1)(va) of the Income Tax Act, 1961 read with sub-clause (x) of clause 24 of section 2, it is held that with respect to the sum received by the assessee from any of his employees to which provisions of subclause (x) of clause (24) of section (2) applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees' accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was of the view that there was no brought forward losses/unabsorbed depreciation carried forward from the earlier years. Accordingly, the Assessing Officer disallowed the same and added to the total income of the assessee. 8. The aggrieved assessee preferred an appeal before the Ld.CIT(A). The assessee before the Ld.CIT(A) submitted as under: 6.2. In this connection, the working for carried forward losses/unabsorbed depreciation furnished during the course of assessment proceedings is enclosed herewith marked as Annexure-A. Please refer last column for AY 2008-09 and 2009-10. This would show that loss of ₹ 1,35,35,021/- for AY 2006-07 was set-off in AY 2008-09 (considering the order giving effect to the CIT(A) order for AY 2008-09) and in the assessment order for AY 2009-10 as per the records of the department. Therefore, it was the observation of the ld. AO that there was no brought forward loss in the year under consideration for set-off against the income of current year. At this juncture, it is pertinent to note that when the impugned assessment order for AY 2010-11 was passed on 14/03/2014, the first appellate order for AY 2009-10 was not passed by Your Honou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee never agitated for the determination of the losses/unabsorbed depreciation of earlier years as held by the Ld. CIT(A). The only plea of the assessee was that there are brought forward losses/unabsorbed depreciation which need to be set off in the year under consideration. We also find that the assessee has filed an Annexure placed on page Nos. 239 240 of the paper-book depicting the losses pertaining to the earlier years which were carried forward in the year under consideration. There was no defect pointed out by the authorities below on the submission of the assessee. Therefore, we are of the view that the matter needs to be adjudicated afresh by the Assessing Officer after giving a reasonable opportunity of hearing to the assessee. Accordingly, we set aside the issue to the file of Assessing Officer with the direction to allow the brought forward losses/unabsorbed depreciation of the earlier year against the current year income as well as to carry forward such losses/unabsorbed depreciation to the succeeding assessment years as per the provisions of law. Hence, the ground of appeal of the assessee is allowed for statistical purposes. 14. The next issues raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c section available under the act, namely, sec 41, under which income of prior year can be taxed. Hence the action of assessing officer in taxing the income of earlier year was proper and is confirmed. However, there is no corresponding section for allowing deduction of expenses pertaining to earlier year. The method of accounting followed by the appellant has to be seen for allowing any chargeable under section 28 to 44DB. Section 145 clearly provides that income chargeable under the head business will have to be allowed as per recognized system of accounting which is to be either mercantile system or the cash system. Admittedly, the appellant follows Mercantile system of accounting. Since under the mercantile system of accounting, prior period expenses are not allowed, the plea of the appellant to allow prior period expenses is rejected. So far as the request for adjustment of prior period expenses to prior period income is concerned, the same can only be done when there is one-to-one correspondence between the income and expenditure. No such relationship has been shown. Even the nature and details of prior period income and expenses are not furnished. In view of this, external t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the view point of the AO by observing that set off prior period expenditure against prior period income could be granted if the such expenditure was incurred for earning such income. In this way, the ld.CIT(A) concurred with the AO. The ld.counsel for the assessee in support of its contentions relied upon the judgment of Hon ble Gujarat High Court in the case of Saurashtra Chemicals reported in 213 ITR 523 (Guj). He also relied upon the judgment of Hon ble Supreme Court in the case of CIT Vs. Excel Industries Ltd., 358 ITR 295 (SC). On the strength of the Hon ble Supreme Court s decision, it was contended that in every year the assessee has prior period expenditure as well as income because in such a big organization quantification of certain expenditure and their crystallization always remained depended upon many circumstances, and sometime they crystallised in the subsequent period. The AO ought to have followed the principle of consistency and allowed the deduction of such prior period expenditure. On the other hand, the ld.DR relied upon the orders of the Revenue authorities below. 60. We have duly considered rival contentions. We find that income of the assessee is be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l provisions of the Act. However, the Ld. CIT(A) disregarded the contention of the assessee and confirmed the order of the Assessing Officer by observing as under:- 6.3. The submissions are considered. Ground number 8 is related to allowing tax credit for MAT, even while computing tax liability on book profit under section 115JB. The stand of the appellant is not supported by any law and so ground number 8 is dismissed. 25. Being aggrieved by the order of the Ld. CIT(A), the assessee is in the second appeal before us. 26. The Ld.AR before us submitted as under:- Assessing Officer has erred in not determining book-profit in accordance with the scheme of the Act as prescribed u/s.115JB. Assessing Officer has further erred in not allowing MAT credit of ₹ 17,26,221/- on tax liability calculated on book-profit u/s.115B. CIT(A) also confirmed such actions of Assessing Officer. A direction may be given to Assessing Officer to compute correct amount of book profit and MAT credit in accordance with law after taking into account the orders passed by Hon ble the ITAT in assessee s own case. 27. On the other hand, the Ld. DR vehemently suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer for fresh adjudication following the provisions of law. Hence, grounds of appeal of the assessee are allowed for statistical purposes. 32. The inter-connected issue raised by the assessee in ground No. 9 to 16 is that the Ld. CIT(A) erred in confirming the adjustment made by the AO for ₹ 2,33,75,788.00 on account of upward transfer pricing adjustment. 33. The assessee during the year has made various international transactions with its associated enterprises including the transactions as detailed under: Sl. No. Description Method used by the assessee Amount in (Rs.) 1. Purchase of Raw Material TNMM 24887354 2. Purchase of Assets TNMM 365800 3. Sale of various products TNMM 145720725 34. The assessee in respect of the above transactions used the TNMM method for determining the Arm Length Price. The assessee has determined the margin in respect of the international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AVERAGE 26.20% 40. In view of above the TPO made ₹ 2,33,75,787/- on account of transfer pricing adjustment as detailed under : Description Amount in Rs. Operating Cost as per books (computed in para 5.1 of show cause notice) 14,74,60,808.00 Profit at Arms length Price (ALP) @ 26.20% of operating cost 3,86,34,731.70 Operating Revenue (at ALP)(A) 18,60,95,539.70 Operating Revenue (Price) received as per books (computed in para 5.1 of show cause notice) (B) 16,27,19,752.00 Shortfall being adjustment u/s.92CA (C=A-b) 2,33,75,787.70 5% of the price shown in the books (i.e. international transaction in cost amounting to ₹ 17,06,08,079/- (Sale and purchases) 85,30,404/- Accordingly, the AO added the sum of ₹ 2,33,75,787.00 the total income of the assessee. 41. Aggrieved assessee preferred an appeal to the Ld. CIT(A). The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns raised by the appellant. ] 7.7. With reference to difference in profit rates, the issue was also raised before the transfer pricing officer as discussed by him in para 6.7. After considering the discussion made by the transfer pricing officer in para 6.7 where TPO has also pointed out various judicial pronouncements, I am of the considered opinion that under Indian transfer pricing system, what is required to be seen is the reasons for supernormal profit and if there are some specific reasons, for supernormal profits, then the profit ratio of such comparable is required to be suitably modified to nullify the effect of reason resulting in such supernormal profit. Following judicial pronouncements is also important: Trilogii E-Business Software India vs. DClT (lTAT Bangalore) [140 ITD 540] : ( Date of pronouncement) 23. 11.2012, AY 2007-08 Transfer Pricing: Comparables cannot be ignored on ground of abnormal profits/losses if they are functionally comparable The assessee provided software research development services to its' USA based AE and was remunerated on a 'cost plus' basis. The assessee claimed that applying the TNMM and using o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o reason to exclude any functionally comparable company from the list of comparables and hence, considering the discussion made by the TPO, and in the light of discussion above, this ground taken by the appellate is rejected. 7.8. Now the issues related to exclusion of companies having turnover difference is considered. The appellant wants that only comparables turnover within the range of 50 percent turnover should be considered. There is no reason given for this. Does a difference in turnover result into high profits? Is it necessary so in the industry or in the market in which the appellant is working? No such examples are shown by the appellant. Does a big size result into only the economies? It is now said that there are more diseconomies rather than economies resulting from a big size. It is rightly said that Small is;Beautiful . 7.9. Coming to the judicial decisions on the issue, some of the judicial findings with the case references are as below: 7.V.J.Trilogy E-Business Software India us. DCIT (ITAT Bangalore) [140 ITD 540) November 23, 2012 (Date of pronouncement), AY :2007-08. Transfer Pricing: Turnover filter is an important criteria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into; consideration for the purpose of making TP study. ( ii) para 19: A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that ,the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are ..with regard to the comparability of the comparable relied upon by the TPO. ( iii) In this regard we find that the provisions of law as the decisions clearly lay down the principle that the turnover ; filter is an important criteria in choosing the comparables. The assessee's turnover is ₹ 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd, v. DCIT, ITA No.1231/Banq/2010). Thus, companies having turnover of mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in public domain which, though not available to the assessee at the time of the TP study, is relevant for the financial year; ( iii) Ordinarily only the data pertaining to the financial year of the transaction can be considered. The proviso to Rule 10B (4) which permits the use of data relating to other than the financial year in which the international transaction has been entered into; being not more than two years prior to such financial year does not mean that one can insist on the use of multi-year data but it has a limited role only when the data of earlier years reveal facts which could have influenced on determination of the TP in relation to the transaction being compared. As the assessee has not made out a case that taking the data for only the current financial year will not present the correct and fair financial result of the comparables, the claim for multi-year data cannot be entertained; ( iv) While in principle, comparables having an abnormal difference of turnover and distorted operating profits have to be excluded for determining the ALP, the claim that as the assessee revenue is about ₹ 20 crores, comparables having more than 50 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nover range of 37 crores to 240crores. Thus the highest turnover company is having turnover of only 14.8 times. In fact the company having a turnover lower than this particular comparable is having higher profit margin. In view of this, I do not find any reason to reject any of the comparable and hence addition made by the assessing officer/transfer pricing officer is being confirmed. For the reasons discussed above, I do not find any logic that only turnover range of 50 percent should be considered. Thus the grounds of appeal related to transfer pricing adjustment are dismissed. 45. Being aggrieved by the order of the Ld. CIT(A) assessee is in appeal before us. The Ld. AR before us filed a paper book running from the page of 1 to 284, and Annexure A to F and submitted as under: At the outset, the issue is covered by the decision of ITAT in Assessee s own case for earlier years as follows wherein application of Turnover filter has been upheld: - Schutz Dishman Biotech P.Ltd. vs. DCIT ITA 954/Ahd/2012 Asst.Year 2007-08 (Annexure B ) - DCIT vs. Schutz Disman Biotech Pvt.Ltd. ITA 2060/Ahd/09 and others Asst.Year 2006-07 (Annexure E ); In view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are also required to be excluded from the comparison as the same would give distorted picture of ALP comparison. Reliance is placed on: - PCIT vs. Barclays Technology Centre India (P.) Ltd. (23018) 95 taxmann.com 170 (Bom) (Annexure F ). - Google India (P.) Ltd. vs. DCIT 55 SOT 489 (Bang) (Annexure D ). 46. On the other hand, the Ld. DR relied on the order of the authorities below. 47. We have heard the rival contentions and perused the materials available on record. In the instant case, the issue relates to the selection of companies selected by the TPO for comparables. The assessee claims that the comparable companies having turnover within the range of 50% of the assessee company should be selected for comparables to determine the ALP. In this regard, we find that the Hon ble ITAT in the own case of the assessee in ITA No. 954/Ahd/2012 for AY 2007-08 vide order dated 05.06.2018 has upheld the selection of companies within the range of 50% of the turnover of the assessee company. The relevant extract of the order is reproduced as under: 8. We have duly considered rival contentions and gone through the record. As observed earlier, the Revenue and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, and thus arrive at a conclusion as to whether transaction bench mark is at arm s length or not. For example, a chosen company, though functionally comparable has entered international transactions beyond a percentage with related parties, it is quite possible that its overall profit may have distorted due to such transaction rendering it as uncomparable. There are so many other circumstances which are required to be examined under FAR analysis, and due to this, adjudicator is required to apply appropriate filter in order to work out comparables which have not under any influence of the related party transactions. Hon ble Bombay High Court in the case of CIT Vs. Pentair Water India (P.) Ltd., 381 ITR 216 concluded that turnover is obviously a relevant factor to be considered for comparability. Hon ble High Court has relied upon the decision of Hon ble Delhi High Court in the case of CIT Vs. Agnity India Technologies (P.) Ltd., (2013) 36 taxmann.com 289. Thus, there are conflicting decisions in favour or against the application of turnover filter. However, the ld.Revenue authorities have not brought to our notice of any judgment of the Hon ble jurisdictional High Court which prohi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 2013-14 after having a reliance on the order of this tribunal in the own case of the assessee ( supra) deleted the addition made by the TPO. The orders of the Ld. CIT(A) are placed on record in Annexure C. 49. The Ld. DR before us has not brought anything on records suggesting that the revenue has preferred an appeal against the order of the Ld. CIT(A). 50. Because of the above, we do not want to deviate from the finding of the Hon ble ITAT in the own case of the assessee as discussed above. Therefore we direct the AO/ TPO to select comparable companies having the nearest turnover to the assessee company. In the instant case, we note that there is a single company as discussed above having the nearest turnover to the assessee company. Therefore we direct the AO/TPO to select that company and make suitable adjustments within the provisions of law. 51. From the above, we note that the assessee succeeds in its appeal by turnover criteria as directed above for the selection of comparable companies. Therefore we refrain ourselves from adjudicating the issue of super profit as indicated by the assessee. Thus the grounds of appeal of the assessee are allowed. 52. The next ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [367 ITR 575 (Guj)] dealt with issue of exclusion in clause (baa) to Explanation of Sec. 80HHC, and that has got nothing to do with provision of Sec.10B and so, that argument is rejected. 8.4. The amount which is allowable to an assessee as a deduction under s. 10B is profits and gains derived by the assessee from 100 per cent EOU. Thus, the amount which qualifies for deduction should be profits and gains directly arising from the activity of conducting the business of the EOU. The income which accrues to an assessee from an activity which is not directly from the conduct of business of the EOU may be an income incidental to the business of EOU but the same cannot be held to be an income derived from the EOU. In the instant case, the assessee has derived the income in question because of his making an investment in EEFC account. To make a deposit in EEFC account is not an activity of actual conduct of the business of the EOU. It is a step removed from the actual conduct of the business of the EOU. Hence, the said income cannot be held to be a profit actually derived from EOU as the same is due to the variation in value of foreign currency and not the value of goods exported. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed on foreign exchange gain. 57. The Ld. DR vehemently supported the order of the authorities below. 58. We have heard the Ld. Representatives appearing for the respective parties. We have perused the relevant materials available on record. At the outset, we find that the Hon ble Ahmedabad Tribunal in the identical facts and circumstances has decided the issue in favor of assessee in the case of ITO vs. Banyan Chemicals P.Ltd. 117 ITD 376 (Ahd)(TM). The relevant extract of the order is reproduced hereunder: 18. On a perusal of this chart, we find that the receipt of ₹ 15,51,239 includes ₹ 15,31,518 as the gain on the sales realization in US Dollar on the date of its receipt and deposit in EEFC account and balance ₹ 19,721 is with regard to exchange gain on import payment. Therefore, the assessee would be entitled to the deduction under section 10B with regard to exchange gain of ₹ 15,31,518 only which is the gain on the day of deposit of US$ in the EEFC Account. In my opinion, therefore, the assessee should be granted deduction under section 10B of the Act with regard to exchange gain of ₹ 15,31,518. I hold accordingly. 59. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Id.AO noticed that there was a variation in actual consumption of raw-material and standard consumption of material. To the show cause, assess,-e explained reasons for the variations in the consumption of the raw material as also extent of and how the variations arisen. However, the ld. AO did not accept the explanation of the assessee and busing his earlier order for the assessment year 2002-03 to 2006-07, an addition of ₹ 62,63.591/- on account of items consumed less than the standard norms and further addition of ₹ 1,43,79,263/- on account of items consumed more than the standard norms were made. These two additions were challenged before the ld. First Appellate Authority, who folloiwng his order of the assessment year 2006-07 while following the order if the Tribunal in the case of assessee for the assessment years 2002-03, 2003-04 and 2004-05 deleted the impugned additions. 14. At the outset. ld. counsel for the assessee has placed on record copy of the order of the Tribunal passed in the assessment year 2005-06 an 2006-07 in ITA No.2060/Ahd/2009 and 3l41/Ahd/2011 wherein similar addition has been deleted. The ld. First Appellate authority has followed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... General Manager, in-charge production. Whether the assessee has followed the prescribed norms is not within the purview of the Income-tax Authority, In our view, the Tribunal has rightly held that the CIT(A) was wrong in relying on the input out consumption ratio. In our view, the Assessing Officer and the Commissioner of Income-tax (Appeals) have gone on different directions. Therefore, the view taken by the Tribunal is required to be accepted. In that view of the matter, we answer issue No. 1 in Tax Appeal No.1182 of 2008 in favour of the assessee and against the revenue. In view of the above, and respectfully following the same, we do not find any infirmity in the order of ld. CIT(A). Hence the ground of appeal of the Revenue is dismissed. 64. Since the facts of the case on hand are identical to the facts of the case in ITA No 525/AHD/2015, accordingly, respectfully following the same we dismiss the ground of appeal of the Revenue. In the result, the Revenue s appeal is dismissed. 65. We summarize the result as under: A. Assessee s appeal in ITA No.1947/Ahd/2015 ( i) Ground Nos.1,2, 7 8 are allowed for statistical purposes. ( ii) Ground No ..... X X X X Extracts X X X X X X X X Extracts X X X X
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