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TMI Blog2018 (4) TMI 1065X X X X Extracts X X X X X X X X Extracts X X X X ..... st order of ld.CIT(A)-XI, Ahmedabad dated 10.3.2014 passed for Asstt.Year 2003-04. 2. As far as cross objection of the assessee in the case of Nirma Ltd., ld. counsel for assessee did not press the CO on the ground that grounds taken in the CO have already been taken in the appeal filed by the assessee. Accordingly, CO No.202/Ahd/2013 is dismissed. 3. Now we take up Revenue's appeal in ITA NO.177/Ahd/2010. 4. The grievance of the Revenue is that the ld.CIT(A) has erred in law and on facts in cancelling penalty of Rs. 9,43,48,749/- imposed by the AO under section 271(1)(c) of the Act. 5. Brief facts of the case are that the assessee has filed its return of income on 1.12.2003 declaring total income of Rs. 98,69,75,310/-. An assessment order was passed under section 143(3) on 24.3.2006 at a total income of Rs. 2,55,31,93,621/-. The major addition made by AO relates to disallowance of interest expenses pertaining to Deep Discount Bonds ("DDB" for short), disallowance of claim under section 80IA and 80IB in respect of wind farm division and disallowance of deduction under section 80IA in respect of Maraiya Division. The ld.AO initiated penalty proceedings and passed order under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not adjudicated." 7. We have duly considered rival contentions and gone through the record carefully. We find that sub-clause (iii) of section 271(1)(c) provides mechanism for quantification of penalty. It contemplates that the assessee would be directed to pay a sum in addition to taxes, if any, payable by him, which shall not be less than, but which shall not exceed three times the amount of tax sought to be evaded by reason of concealment of income and furnishing of inaccurate particulars of income. In other words, the quantification of the penalty is depended upon the addition made to the income of the assessee. In the present, quantum addition on which penalty has been imposed was challenged before the Tribunal and the Tribunal vide order dated 18.3.2008 (supra) set aside all issues and restored to the file of ld.CIT(A) for fresh adjudication. Same is now adjudicated by the ld.CIT(A). Therefore, we deem it appropriate to set aside the impugned order of ld.CIT(A), because it based on an order which has already been set aside. The question, whether penalty is to be imposed or not be required to be adjudicated again by the ld.CIT(A) on the basis of fresh order passed by her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tailed analysis in the Asstt.Year 2001-02. Discussion made by the Tribunal on the issue reads as under: "3.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgements cited by both the sides. First of all, we reproduce the provisions of Section 43(1) and its Explanation (3) which are as under: "43. In sections 28 to 41 and in this section, unless the context otherwise requires- (1) "actual cost" means the actual cost5 of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met5 directly or indirectly by any other person or authority: [Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, [but before the 1st day of March, 1975,] and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty-five thousand rupees.] Explanation 1.--Where an asset is used in the business after it ceases to be used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e A.O. has to establish that the main purpose of transfer of such asset was the reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish this, it has to be established that apart from claiming additional deprecation on enhanced cost, there is no other main purpose for acquiring the asset in question. In the present case, the A.O. is only disputing the valuation of intangible asset i.e. the trademark acquired by the assessee from related parties without even making an allegation that such acquisition of assets was not having any main purpose except claiming extra depreciation. This can be explained by way of an example also. 'Let us assume that Mr. 'A' purchases a machine which is very much required by him for his business purpose but for such acquisition of machine by him, he paid some extra price as per the A.O. This is not the case of the A.O. that using of machine for business purpose is not the main purpose of acquiring of machine and in that situation, in our humble opinion, the A.O. cannot invoke Exp.(3) to Section 43(1) of the Act. In our considered opinion, this requirement has been specified in Explanation ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and in our considered opinion, the A.O. has miserably failed on this aspect. Even if all the allegations of the A. O. are accepted, in the absence of any allegation supported by cogent material to the effect that business use of the asset in question was not even one of the main purposes, it has to be accepted that business use of the asset was at least one of the main purposes even if not the only main purpose and hence, the allegation of the A.O. that main purpose of transfer of this asset was to reduce the tax liability of the assessee can be at the best one of the main purposes but it certainly cannot be main purpose. This is not sufficient to invoke this Explanation (3) to Section 43 (1). In fact, in the present case, the A.O. has not even made any attempt or allegation on this aspect and nothing has been brought on record by the A.O. that the asset in question was not acquired by the assessee with main purpose being business purpose and, therefore, the main purpose of acquisition of this asset was to reduce the tax liability of the assessee. Hence, in our considered opinion, the A.O. did not fulfill the pre requirement of invoking Exp.(3) to Section 43(1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluation of trademark in question, we do not find fault in adopting 4% rate of royalty being agreed rate of Royalty from 01.04.2002 for the purpose of valuation of Trade Mark as has been done by RSM & Co., Chartered Accountants. Regarding this allegation of the A.O. that goodwill was not transferred by NCWL to NCCL and NL, we are of the considered opinion that it has no bearing on the valuation of trade mark because we are considering the amount the assessee is paying for the asset and what income is expected from the asset. This is not the case of the A.O. that the sub license to NL and NCCL by NCWL was not acquired by the assessee company in full. Whatever has been sub-licensed to NL and NCCL, the same was acquired in full by the assessee company and, therefore, the royalty rate expected by the assessee company in future has to be accepted @ 4% as per the agreement between NCCL and NL with NCWL and even if the same is without goodwill, it makes no difference since the assessee company in future is assured of 4% royalty and the same has to be adopted for the purpose of valuation. Moreover, as per remaining three valuation reports also, the value worked out by these valuers was mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Gujarat. 16. With the assistance of the ld.representatives, we have gone through the record carefully. Basically, it is a consequential issue on the basis of re-determination of value of brand and trademarks by the AO. Figures of unabsorbed depreciation and loss have changed in earlier years. In other words, the assessee took the value of brand at Rs. 500.00 crores which was reduced by the AO at Rs. 53 crores. This has given rise to different valuation for unabsorbed depreciation and unabsorbed loss. If this value has been accepted then again figure of unabsorbed depreciation and loss would change. Thus, the ld.CIT(A) has rightly directed the AO for re-computation of unabsorbed depreciation and loss for carry forward. It is pertinent to observe that as and when this figure and any other figure or other would change on the basis of order giving effect of higher authorities consequential effect would be given. Thus, there is no merit in this ground of appeal, it is rejected. 17. Ground no.3 and 4: Both these grounds are interconnected with each other. Revenue has pleaded that the ld.CIT(A) has erred in law and on facts in deleting addition of Rs. 40,99,56,735/- which was added by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the holders have not offered the income on accrual basis. It has been pointed out by the appellant that the issue of expenses of Deep Discount Bonds is decided in its favour by ITAT Ahmedabad in its own case for A Y 2004 - 05 and 2005 - 06. It is noted that the claim of the appellant is correct the Hon'ble ITAT Ahmedabad has decided the issue in ITA number 386 & 658/AHD/2010 in its own case for A Y 2001- 02 by order dated 14/1/2013 and ITA number 3946- 47/AHD/2008 for A Y 2004-05 and 2005-06 by order dated 13/07/2009. The issue has been discussed in para 159 and 167 on page 60 and 61. It has been held by the Hon'ble ITAT that the interest expenses should be allowed on pro rata basis for the period of holding of the Bonds. Respectfully following the judgement, the addition made by the Assessing Officer is directed to be deleted. The AO has also disallowed the interest/discount cost of Rs. 2,65,24,193/- claimed by the appellant on the OFCPNs repurchased during the year. The appellant had issued these OFCPNs in financial year 2001 - 02. The appellant claimed interest expenditure on pro rata basis in the first year. Subsequently in the next year, that is, in the current ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03.07.2009, copy of which is available on pages 120- 181 of the paper book. In particular, our attention was drawn to para 26 of this tribunal decision which is available on page 131 of the paper book. 6.2.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the Tribunal decision cited by the Ld. A.R. We find that in those cases also, the ground raised before the Tribunal was regarding direction of Ld. CIT(A) confirming the disallowance of Rs. 4072.70 lacs being interest relating to deep discount bonds series A & B and it was held by the Tribunal in that case that the assessee is entitled to proportionate claim of expenditure towards discount/interest of DDBs on actual basis in the year of appeal and the A.O. was directed to correctly work out the same and to allow deduction to the extent it relates to the year under appeal. In the present case, Ld. CIT (A) has decided this issue by following this very order of the tribunal cited before us and he has granted relief to the assessee with similar directions to the A.O. as has been given by the Tribunal in the case of Nirma Ltd. (supra). Hence, we do not f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g term capital gain, and if they are converted into shares then nothing would come to the assessee. Relevant finding of the Tribunal in the case of Kulgam Holdings P.Ltd.. (supra) on this issue reads as under: "2.8.4 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that admittedly, the income was offered by the assessee itself vide letter dated 11.08.2004 although under protest and this is also true that this issue was never raised before the authorities below and the same is raised before us by way of this additional ground. Ideally, in such a situation, we generally restore back the issue to the file of Ld. CIT (A) or to the A.O. for their decision first. But in the peculiar facts of the present case, as per which a legal issue has to be decided as to whether as per the terms of OFCPN of Nirma Industries Ltd., it can be said that any income is accruing on year to year basis or not, we feel that since the terms of issue are very much available before us and the same were available before the authorities below also, the issue can be decided at our level and, therefore, it is not necessary that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's own case for the Asstt.Year 2002-03. Thus, respectfully following order of the ITAT we do not find any merit in this ground of appeal, it is rejected. 26. In the result, appeal of the Revenue is dismissed. 27. ITA No.1599/Ahd/2013-Nirma Limited (AY: 2003-04) 28. This is an appeal by the Revenue. In the first ground of appeal, Revenue has pleaded that the ld.CIT(A) has erred in deleting disallowance of Rs. 24,71,32,934/- claimed by the assessee towards interest expenditure on Deep Discount Bonds Series A, B, C and Deep Discount Bonds vested into the assessee- company upon demerger of operating division of Nirma Industries Ltd. 29. The amount mentioned by the Revenue is not a correct figure. Out of total claim of Rs. 24.74 crores, the ld.CIT(A) has granted relief to the extent of Rs. 22,75,11,447/-. A disallowance to the extent of Rs. 1,96,21,487/- has been confirmed which is discernible from the finding of the ld.CIT(A) recorded in para 3.5 of his order. 30. Brief facts of the case are that the assessee had issued secured redeemable Deep Discount Bonds Series A, B, C in order to re-finance existing short term debt and part finance of normal capital expenditure of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill get a relief of Rs. 22,75,11,447/-)" 33. With the assistance of the ld.representatives, we have gone through the record carefully. An identical issue came up in the case of Nirma Industries. While adjudicating ground nos.3 and 4 we have considered this issue in para 17 of this order. We have followed order of the ITAT passed in earlier years and held that interest expenditure incurred by the assessee on Deep Discount Bonds is an allowable expenditure on accrual basis in this year also. Following the order of the ITAT in earlier years, and in view of the above discussion, we are of the view that the ld.CIT(A) has followed order of the ITAT and allowed prorata deduction of interest expenditure. There is no error in order of the ld.CIT(A), hence, this ground of appeal is rejected. 34. Ground no.2: In this ground of appeal, grievance of the Revenue is that the ld.CIT(A) has erred in deleting the disallowance of deduction under section 80IA of Rs. 95,98,355/-. 35. Brief facts of the case are that the assessee had a wind farm division which has generated electricity. It claimed deduction under section 80IA of the Act at the rate of 30% on the income of Rs. 3,19,94,515/-. This ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O to allow assessee's claim for unabsorbed depreciation of demerged company viz. Nirma Industries. 39. With the assistance of the ld.representatives, we have gone through the record carefully. It is pertinent to note that operating division of Nirma Industries was merged with appellant company i.e. Nirma Industries w.e.f. 1.2.2003. This merger was approved by the Hon'ble Gujarat High Court. The issue of valuation of intangible assets in the hands of Nirma Industries has been decided by ITAT in ITA No.386/Ahd/2010 dated 24.1.2013. This merger was completed and assessments for the Asstt.Year 2001- 02, 2002-03 and 2003-04 in the case of Nirma Industries were completed, therefore, the ld.CIT(A) has directed the AO to take into consideration unabsorbed depreciation and loss as on 1.2.2003 in the operating division of Nirma Industries should be accounted for in the accounts of Nirma Ltd. i.e. respondent herein. We do not find any error in this direction of the CIT(A) because once demerger has been approved by the Hon'ble High Court, then all assets and liabilities of demerged company would be taken into consideration in the new company. Carry forwarded unabsorbed depreciation and loss h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er book. 45. With the assistance of the ld.representatives, we have gone through the record and judgment of Hon'ble Gujarat High Court and find that Hon'ble High Court has upheld conclusion of the Tribunal for treating sales-tax subsidy as capital receipt. The ld.CIT(A) followed this decision in the impugned order, and therefore, her order does not call for any interference. In view of above, this ground of appeal is rejected. 46. Ground No.7: In this ground of appeal, grievance of the Revenue is that the ld.CIT(A) has erred in holding that a sum of Rs. 94,74,24,668/- could not be added in the book profit for the purpose of section 115JB of the Act. 47. Brief facts of the case are that on verification of accounts, the ld.AO observed that the assessee has written off Rs. 94,74,24,668/- as licence fee on 31.3.2003. He further observed that the assessee is being assessed for the purpose of levy of tax under MAT provision, and therefore, by writing off of this amount, it has reduced its liability under the MAT substantially. The ld.AO confronted the assessee with a query viz. "explain as to how this capitalized licence fee can be written off and claimed as deduction in the profit & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 01-04 - 27.71,12, 000 Opening. WDV as per hooks 1.06,28,8 8.000 Depreciation fix the year 02-03 13,85,56, 000 10.34% of Gross amount as per original accounts Reversal of Depreciation tor the period from 01.02.03 In 31.03.03 pursuant to demerger -2.30. 92.66 7 (13,85,56,000*2/12) WDV of License fees As at at 30.01.03 94,74,24, 777 Amount Written off pursuant to demerger In this regard, we wish to clarify that though the assessee has written off the "Licence Fees" in the hooks of Account the same has not be claimed as deduction in the computation as conceived in your above query. Please note the amount written off by way of depreciation in the books of account, is added back in the computation of income in respect of the Moraiya (Detergent division). AO's Query It Explain (IS to how this licence has ceased to exit as on 3/-3-03 without a sale or surrender of the same so that (here was heed to write-off the same. Our submissions: As regards to the cessation of the existence of the licence and need 1.0 write off the same, please note that though the asset has not ceased to exist the amount is required to he written off in the hook of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and contended that profit and loss account of the assessee was prepared according to Part-II and Part-III of Schedule-VI to the Companies Act, 1956 and auditors have duly authenticated this account. These were approved by the Board of Directors. Thus, the AO has no power to tinker with these accounts. He has not made any adjustment as provided in clause (a) to (f) under Explanation 1 to Section 115JB. 49. On due consideration of the above facts and circumstances, we find that the ld.CIT(A) has recorded a categorical finding that the AO nowhere brought on record that accounts of the assessee were not drawn as per Part-II and Part-III of the Schedule-VI of the Companies Act; whereas the accounts are prepared accordingly and if profits are computed, the accounts are audited and approved in the Board of Directors' meeting, then the AO has no power to make adjustment. The issue in dispute is covered by decision of the Hon'ble Supreme Court in the case of Apollo Typres (supra) and the ld.CIT(A) has correctly applied this decision. Therefore, we do not find any merit in this ground of appeal. It is rejected. 50. Ground Nos.8 and 9: These are general grounds of appeal, which do not requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, the issue before the Tribunal is whether profit of Moraiya Division for the purpose of deduction under section 80IA is to be reduced by allocating loss of corporate division in the ratio of turnover ?. The ld.counsel for the assessee while impugning order of the ld.CIT(A) contended that if the loss from the corporate division is being allocated to this unit, then profit of other divisions ought to be allocated which would enhance eligible profit for grant of deduction under section 80IA. He further contended that basically loss of corporate division is the result of interest expenditure incurred on DDB. If details of fund available with Moraiya Division and its assets are being considered, then it would reveal that this concern does not require any funds for running of its activities. He took us through submissions filed before the ld.CIT(A) which are reproduced in para 6.2 of the impugned order. It reads as under: "6.2 During the appellate proceedings appellant vide its letter dated 20.3.2011 made following submissions:- "Ground No.9: Allocating loss of Corporate division: Vide discussion at para 8 on page no. 24 of the assessment order, the Id. A.O. reduced the pro-ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... division should not be allocated towards profit of this division for the purpose of deduction u/s.80IA of I.T. Act." 6.3 On this issue the appellant vide his letter dated 20.2.2013 further submitted as under :- "2. Para 2 of your letter As per Return of Income loss in corporate division was Rs. 46,31,65,493/-. In the assessment order passed u/s.143(3) of I.T. Act, the interest/ discount on DDEs made for Rs. 24,71,32,9347- in the assessment order. The loss of corporate division worked out to Rs. 21,60,32,559/- on account of disallowance of interest/ discount on DDEs. Hon'ble Tribunal allowed the claim for Asst. Years 2002-03 and 2004-05 vide order dated 13-07-2009. Copy was enclosed in Annexure E vide submission dtd.20.03.2012. Though deduction is not allowed during Asst. Year 2003-04. However, as per direction of Hon'ble Tribunal the pro-rata allowance of DDB comes to Rs. 22,75,11,624 as per working enclosed marked as Annexure B. Therefore the revised loss of the corporate division will be Rs. 44,35,44,183 as per the following calculation. Particulars Amount(Rs.) Corporate loss as per Return of Income (46,31,65,493) Add: Disallowance in the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atable to Moraiya Division; but from the misc. expenditure, if it is discernible that some of the expenditure must have been attributable to this concern, then those expenditure are to be identified by following some formula; for example, they can be allocated in proportionate to the turnover or some other methods. The finding of the ld.CIT(A) to the extent of above proposition is not disturbed. The question is, whether interest expenditure of Rs. 44.35crores representing DDB has any relationship with the activities of Moraiya Division. The assessee has pointed out that its profit for the last two years was Rs. 2791.97 lakhs and Rs. 1779.89 lakhs. Fixed assets of this division is of Rs. 3195.28 lakhs, as against fixed assets of the company at Rs. 2125.30 crores. The DDBs were issued by the company for raising capital. It is to be seen whether this capital was being used for the purpose of acquiring assets in this division. Assessee pointed out that fixed assets of this division is of Rs. 3195.28 lakhs (roughly Rs. 31 crores), as against aggregated fixed assets of the company at Rs. 2125.30 lakhs. Similarly profit for the last two years in the Moraiya Division was Rs. 27.91 crores a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of section 80IA(9) do not restrict the deduction under other sections of chapter VIA to the extent of eligible income for deduction under section 80IA" 63. The ld.Revenue authorities are of the view that while calculating deduction under section 80HHC deduction granted to the assessee under section 80IA is to be reduced. However, this decision of Hon'ble High Court was in favour of the assessee. The ld.counsel for the assessee contended that this matter has been referred to larger Bench of the Hon'ble Supreme Court and the issue is pending. He prayed that this issue be set aside to the AO and to be adjudicated afresh after decision of Hon'ble Supreme Court. The ld.DR on the other hand is unable to controvert his proposition. 64. We find that in Tax Appeal No.423 of 2007 Hon'ble High Court has also taken cognizance of this fact by recording the following finding in the order: "6. Similar issue as decided in Tax Appeal No.763 of 2009 is before the Hon'ble Apex Court which is pending for adjudication. Accordingly, issue No.(B) raised in this appeal is presently answered in favour of the assessee in view of decision of this Court in Tax Appeal No.763 of 2009 subject to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of the Hon'ble jurisdictional High Court in the case of CIT Vs. Priyanka Gems Vs. ACIT, 367 ITR 575. We find that this decision has been considered by the ld.CIT(A), and thereafter on verification of the details, the ld.CIT(A) accepted case of the assessee in principle. We do not find any error in the order of the ld.CIT(A). If sale proceeds of exported items could not be realized by the assessee and on account of exchange fluctuation the assessee received more sale proceeds, then the total amount will qualify for grant of deduction under section 80HHC. However, the ld.CIT(A) has observed that the assessee has taken various foreign currency loans and on repayment of which exchange gain was there. These are not related to export activities of the assessee, hence, the ld.CIT(A) has rightly disallowed the claim of the assessee. 70. With regard to profit on sale of asset is concerned, the ld.counsel for the assessee contended that the assessee itself has not included this amount in the eligible profit for grant of deduction under section 80HHC. We remit this issue to the file of the AO for verification and re-adjudication. If the assessee itself has excluded this amount, then i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement of export turnover involved in insurance claim. It is pertinent to observe that if the claim represented exported goods which have been damaged in transit, then such receipt could be considered as derived from export of articles. It can be understood by way of following example; viz. an assessee is engaged in manufacture and export of sea-foods. It has exported frozen sea-food. On account of some mishaps, due to electricity failure, fishes got damaged/decayed in transit and the assessee received claim. This claim would be construed as derived from export activities. On the other hand, a claim has been received by an assessee on account of some damage to the plant & machinery, then that would not qualify for consideration for grant of deduction under section 80HHC. Neither the AO, nor the ld.CIT(A) has determined nature of insurance claim in the impugned order. Therefore, we deem it appropriate to set aside this limited issue to the file of AO. The ld.AO first determine the nature of insurance claim in the light of the above discussion, and then decide its inclusion or exclusion from eligible profit for grant of deduction under section 80HHC. As far as other items are concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account" has to be interpreted as if such words were never in the section, as its omission is without a saving clause. Written down value has to be taken as per the meaning or definition given in the Act. Even before the omission of terms "as appearing in the books of account", the emphasis of the legislature in Explanation 2B, in our humble opinion, is the written down value of the transferred asset. The omission of these words "as appearing in the books of account" with effect from 1-4-2004, in our humble opinion, is curative and thus retroactive. Hence, we uphold the findings of the demerged company shall constitute the written down value of the block of assets of the resulting company." 10.8 The above discussion makes it very clear that the amendment made by Finance Act, 2003, in the explanation 2B to section 43(6) of the IT.Act is curative in nature and thus the same is retroactive. Taking into account the provisions of section 2(19AA), 49(2C), 49(2D), 72A and explanation 2A & 2B of section 43(6), the Hon'ble ITAT had held that the Tax written down value of the transferred assets of the demerged company shall constitute the written down value of the block of as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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