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A batch of Petitioners had filed a Writ before the Rajasthan HC requesting for filing of Form TRAN-1 to avail transitional credit. It was also prayed that the Respondents should give effect to Form TRAN-1 that had been manually submitted to avail relevant legitimate Input Tax Credit.
The HC observed that the prayers made in the Writ are similar to that as made in the case of Obelisk Composite Technology LLP vs. Union of India and Others [(D.B. Civil Writ Petition No. 18392/2019]. Accordingly, the HC observed that the present writ was liable to disposed similarly. Therefore, in line with the judgement in Obelisk (supra), the Rajasthan HC granted liberty to the Petitioners to make applications before GST council through Standing Counsel, who shall further hand over the same to the jurisdictional officer for forwarding the same to the GST Council to issue requisite certificate of recommendation along with requisite particulars, evidence and a certified copy of the order instantly and such decision be taken forthwith and if the Petitioners’ assertion is found to be correct, the GST Council shall issue necessary recommendation to enable the Petitioners to get the benefit of CENVAT credit within the stipulated time as stipulated by the Union of India.
Trivedi Ventures LLP vs. Union of India [D.B. Civil Writ Petition No. 4182/2020]
The Applicant was engaged in the business providing Pharmaceutical Research & Development services, which inter alia involves preparative separation and analysis of pharmaceutical compounds. Catering to expansion of the business, the Applicant had acquired land on lease for a period of 33 years and executed a lease deed;
As per the terms of the deed, the Applicant was required to pay one-time lease premium at the beginning of the lease and also annual lease rentals at the end of every year to the lessor for 33 year. The Applicant was also required to pay maintenance charges for the leased premises. Further, at the end of the year, the lessor would also be required to pay GST on the Annual Lease Charges and maintenance charges at the applicable GST rates;
The Applicant contended that Section 16(1) of CGST Act allows a registered person to take credit of ITC on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business. Therefore, in order to avail credit, the services supplied to him should be used in the course or furtherance of his business;
The Applicant had availed credit of GST on supply of leasing services to them by the Lessor for the land acquired on lease. The land so acquired on lease would be used by them in rendering the Chromatography services from the lab to be constructed on the land. Thus, they have had taken ITC on services which were used in the course of business;
The Applicant further submitted that the word ‘business’ is to be understood as continuous activity and not confined or restricted to mere manufacture of the product or provision of a service. Activities in relation to the business cover all activities that are related to the functioning of the business. Words ‘in the course or furtherance’ further widens the scope. The functions primarily encompass the entire gamut of activities involved in the process of manufacture of goods or provision of service. The other functions are in the realm of obligations – some self-imposed and others by way of laws enacted for the welfare of the working class. Therefore, it would be apparently clear that the lease charges paid for land has been used in course of business and eligible for ITC;
It was further submitted by the Applicant that GST paid by them on the lease charges does not get covered in the ineligible list of input services in terms of Section 17(5) of the CGST Act. The Applicant submitted that restriction for availement of ITC placed by way of exception should be construed in a reasonable and purposive manner so as to advance the objective of the provision. Therefore, the leasing service received by the Applicant was not an ineligible input service and they have rightfully availed services on the same.
Lastly, the Applicant had submitted that the activity of leasing of land is not included in Schedule III of the CGST Act and as such the activity of leasing of land amounts to Supply. Further, the activity of leasing of land has specifically been included in Schedule II of CGST Act as supply of service and is thus liable to GST.
The Telangana AAR observed that in terms of Section 17(5) of the CGST Act, the definition of ‘immovable property’ is an inclusive definition and includes all the things attached to the earth or permanently fastened to anything attached to the earth. The AAR further observed that the ‘building’ constructed by the Applicant unquestionably falls within the ambit of ‘immovable property’. Further, as per the agreement, the building after completion of construction would be utilised by the Applicant for their own utility to accommodate a laboratory;
It was further observed that as the building to be constructed by the Applicant does not amount to ‘plant and machinery’, the same would not be excluded from Section 17(5) of the CGST Act. Basis the above observations, the Telangana AAR held as follows:
This ruling of the Telangana AAR comes as no surprise as other AARs have also similarly denied ITC on construction of immovable property on own account. Most notably, the Tamil Nadu AAR in the case of Shree Varalakshmi Mahaal LLP [Order No. 51/ARA/2019 dated 25 November 2019] had denied ITC on construction of Marriage hall used in furtherance of ‘renting’ business. Similarly, the West Bengal AAR in the case of GGL Hotel and Resort Company Limited [30/WBAAR/2018-19 dated 08 January 2019] had disallowed ITC of lease rent paid during pre-operative period for leasehold land on which resort was being constructed on his own account to be used for furtherance of business.
Basis the instant ruling of the Telangana AAR and several other rulings, it is inferred that the issue of ITC on immovable property would be further litigated at higher judicial forums.
Daicel Chiral Technologies (India) Private Limited [TSAAR Order No. 05/2020 dated 24 June 2020]
The Petitioner, engaged in the business of trading of steel pipes, was entitled to transition the credit of the amount of Excise duty available in the pre-GST regime. In order to avail the transitional credit, the Petitioner was required to file form TRAN-1 within a period of 90 days. However, on account of technical glitches and other difficulties faced by the taxpayers, the time limit for availing the transitional credit was extended several times and lastly it was extended up to 27 December 2017;
The Petitioner was unable to log in to the common portal between 24 December 2017 to 27 December 2017 and avail transition of credit, presumably because of low bandwidth, given the fact that large number of taxpayers across the country were trying to file Form TRAN-1 before the last date i.e. on 27 December 2017;
The Petitioner relied upon CBIC Circular No.39/13/2018-GST dated 03 April 2018, wherein the grievances of the tax payers who could not file the declaration due to technical glitches on GST Portal had been addressed. It was further submitted by the Petitioner that the Revenue authorities had retracted the approval granted for filing form TRAN-1 by 31 March 2019;
The Delhi HC observed that the nature of the relief sought by the Petitioner was fully covered by the decision of Delhi HC itself in the case of Blue Bird Pure Private Limited [2019 SCC OnLine 9250]. Accordingly, the Delhi HC had disposed the petition and directed the Revenue to either open the online portal so as to enable the petitioner to file the Form TRAN-1 electronically, or to accept the same manually on or before 20.11.2019.
Aggrieved by the decision of Delhi HC, the Revenue authorities had challenged the same before the Apex Court. The SC has tagged the case along with other similar matters.
Union of India vs. Arora and Company [Special Leave Petitioner (Civil) Diary No(S). 5154/2020]
Right from the inception of GST law, there have been several controversies in relation to transitional credit. Be it the eligibility of additional duties in the erstwhile regimes, or the time limit to avail the credit, every aspect of transitional credit has been subjected immense litigation. Most recently, the judgment of Delhi HC in the case of Brand Equity Treaties Limited [W.P.(C) 11040/2018] had stirred up the controversy by holding that the time-limit prescribed for transitional credit as 'directory'. However, as the said judgment has been stayed by the Apex Court, the issue cannot be said to be settled just yet.
In light of the above controversies, it is contemplated that issue in relation to transitional credit would be settled only with a clear and unequivocal decision of the SC.
The Appellant, a manufacturer of various types of dutiable iron and steel products, used several duty-paid input materials and availed various input services and availed and utilized CENVAT credit of duty or service tax paid thereon in terms of the CENVAT Credit Rules (‘CCR’).
As per the amended provisions to Rule 6, a manufacturer of goods or provider of output services who did not maintain separate accounts as provided for under Rule 6(2) of the CCR was given two options, in terms of Rule 6(3)(i) the manufacturer could make payment of an amount equal to 10% of the value of the exempted goods. However, in terms of Rule 6(3)(ii) of the CCR, the manufacturer of goods could opt for paying an amount equivalent to the CENVAT credit attributable to input and input services used in or in relation to the manufacture of the exempted goods subject to the conditions and procedure specified in Rule 6(3A) of the CCR;
As the amended Rule 6(3) and 6(3A) came into effect only on 01 April 2008, the Appellant required some time to work out the new computations. Accordingly, the Appellant continued to make payment as before, which was 10% of the value of the exempted goods, coal tar and CO gas as provided in the erstwhile Rule 6(3)(b) of the CCR for April 2008;
Subsequent to finalization of the option, the Appellant, in prescribed manner, intimated to the Revenue that the Appellant proposed to exercise the option under Rule 6(3)(ii) on and from 01 April 2008 and since it had already made payment @10% for the month of April 2008, in case of excess payment it would file refund application whereas in case of short payment it would make payment of the balance amount due;
The Revenue authorities disputed that as the Appellant had deposited specified amount equal to 10% of the value of the exempted goods for April 2008, it had already exercised and availed option in terms of Rule 6(3)(i) of the CCR for the F.Y. 2008-09 and hence, could not withdraw the same and exercise option in terms of Rule 6(3)(ii) of the CCR. Subsequently, the Appellant was subjected to a Show Cause Notice (‘SCN’) alleging contravention of the provisions of CCR with a proposed recovery and also proposed imposition on penalties;
The Appellant contended that the restriction provided under ‘Explanation-I’ of not being able to withdraw the option during the remaining part of the F.Y. can arise only when a manufacturer has exercised such option with due intimation to the Revenue authorities. It was further submitted that in any event, Rule 6(3) cannot be made automatically applicable on failure to intimate in writing about option to be availed, it is upto the Appellant to avail a particular option and Revenue cannot insist on availement of a particular option, no such power being conferred either under the CCR or the principal Act;
Relying upon various judgments of the SC and Tribunals, the Kolkata CESTAT observed that there is no requirement under Rule 6(3)(i) and Rule 6(3A) of the CCR that the option had to be exercised on the first day of the financial year or the first month thereof. The Tribunal further held that the said provisions clearly indicates that such option could be exercised at any point of time during a F.Y. by a manufacturer and the only restriction under Explanation-I of Rule 6(3) is that once such option is exercised, the same has to be continued with during the remaining part of the financial year;
It was further observed that there was no document disclosed either in the SCN or in the order which evidences exercising of the option by the Appellant. Exercising an option is a positive act and cannot be inferred as has been sought to be done by the Revenue authorities;
Basis the above observations, the Kolkata CESTAT held that there had been due compliance by the Appellant under Rule 6(3) and (3A), including the procedure laid down therein and the Appellant has legally and validly availed the option in terms of Rule 6(3)(ii). Lastly, it was held that the demand confirmed by the Revenue authorities choosing such an option in the SCN cannot be sustained, thereby, the Tribunal set aside the order and allowed the appeal.
Tata Steel Limited vs. CCEx. and ST, Jamshedpur [Excise Appeal No. 01 of 2011]
The Petitioner was registered under the erstwhile Service Tax Law for rendering services relating to construction and sale of residential apartments. The Petitioner had been subjected to a Show Cause Notice (‘SCN’) in October 2011, to pay a differential duty for the period December 2008 to January 2010. Subsequently, another SCN was issued in February 2012, essentially covering the same period with the addition of February and March 2010;
As against SCN 1, the Petitioner had paid a substantial amount during the proceedings, which had been appropriated in the Order. As for the SCN 2, the Revenue had initiated proceedings after 4 years. The Petitioner objected the delay in initiating the proceedings and submitted that issue pertains to the same matter as covered in the OIO 1 where the tax had already been paid;
The Petitioner had submitted that there was no short payment of tax as the receipts missed by them to be included in period April 2009 to March 2010 was included in the subsequent returns. The Petitioner further submitted that SCN 2 essentially covered the same period as SCN 1 except for February and March 2010;
In respect of OIO 1, the Petitioner had preferred an Appeal before the Commissioner (Appeals) and paid statutory deposit. During the pendency, the Sabka Vishwas Legacy Dispute Resolution Scheme, 2019 (‘SVLDRS’) was announced to settle disputes in various legacy laws including service tax law. The Petitioner availed the same;
The Petitioner challenged the OIO 2 vide an Appeal. Subsequently during the pendency of the Appeal, the Petitioner availed the benefit of SVLDRS. The SVLDRS application was rejected on the ground that the Petitioner was required to pay 30% of the demand as mentioned in OIO 2.
Aggrieved, the Petitioner preferred a Writ before the Madras HC. It was further observed by the HC that there was an overlap between the period covered under SCN 1 and SCN 2, the former covering the period December 2008 to January 2010 and the latter the period April 2008 to March 2010. The periods December 2008 to January 2010 were thus common under both SCN;
The Madras HC accepted Petitioner’s submissions that double demands were raised for Periods 1 and 2. Thus, as far as the demand equal to the demand of period 1 was concerned, the HC held that it ought not to have been raised at all. The remaining demand corresponding to Period 2 was also covered by the amount already paid for the same period earlier. The HC concluded that the total taxable value of the two projects under both SCN 1 and 2 was identical. Basis the above, the HC accepted the computation of the Petitioner and set aside the impugned order of the Revenue;
The HC further remarked that the Dispute Resolution Scheme is an attempt to close legacy tax disputes and a certain amount of fairness should be seen in the interpretation of the provisions of the Scheme;
Lastly, the HC rejected the Revenue’s argument that a dispute raised under one SCN cannot be settled by utilizing a deposit made under a different SCN as in the present case, both the SCNs relate to identical transactions, time periods and demands and constitute a duplication of proceedings.
Navin Housing and Properties Private Limited vs. The Designated Committee under SVLDRS [W.P. No.477 of 2020]
The Petitioner, had provided various consulting engineering services to its parent Company, situated in Germany and other companies of the same group without the payment of Service Tax, under the bona fide belief that they were not liable to pay any service tax. However, the Petitioner was subjected to a SCN requiring them to pay the service tax on the basis of the allegation that the services provided by them did not amount to export as the Petitioner and its customers were mere establishments of the same legal entity. Aggrieved, the Petitioner preferred a Writ before the Gujarat HC.
The Petitioner submitted that the of Revenue had not only gone beyond its jurisdiction, being contrary to Rule 6A of the Service Tax Rules, but also against public interest since it would act as a deterrent to the trust given for export of services out of India by the Government, through its various scheme such as ‘Served from India Scheme’ and ‘Make in India’.
It was further submitted by the Petitioner that the Respondent’s interpretation of law, by which, the holding company of the Petitioner is considered as its other establishment is contrary to the object and purpose of encouraging the export of services from India to locations outside India. Such interpretation made by the Respondent would be wholly arbitrary and contrary to the scheme and provisions of the Act and the Rules inasmuch as in terms of the definition of ‘exempted service’ provided in Rule 2(e) of the CENVAT Credit Rules, 2004 the provision of services by the Petitioner would qualify as an ‘Export of Service’, and therefore the provisions of Rule 6(3) of the CENVAT Credit Rules would have no applicability.
The Petitioner submitted that the Respondent was seeking to bring within the ambit of service tax law, all services provided by any Indian Company, outside India, to its holding Company or its other group Companies located outside India in an arbitrary manner, despite the fact that the same would qualify as an ‘export of service’ which is not liable for levy of service tax.
On the other hand, the Respondent had challenged the vires of the Writ Petition stating that the same is issued against a Show Cause Notice which is yet to be adjudicated by the competent authority. The Respondent further submitted that the issuance of Show Cause Notice does not give rise to a cause of action to the writ petitioners under Article 226 of the Constitution of India and it does not amount to an adverse order, which affects the right of any party unless the show cause notice has been issued by a person having no jurisdiction to do so, which is not fact in the present case.
The Gujarat HC observed that Show Cause Notices only expresses prima facie opinion and the Petitioner has failed to make out a case of non-application of mind by the competent authority to issue SCN and even if the SCN is issued on the basis of the points raised by the Audit Officer, it cannot be construed as intervention in the judicial function of the adjudicating authority.
The HC further observed that the Respondent assumed the jurisdiction on mere misinterpretation of Section 65B(44) of the Finance Act r/w. Rule 6A. By no stretch of imagination, can it be said that the rendering of services by the Petitioner to its parent Company located outside India was service rendered to its other establishment so as to deem it as a distinct person as per explanation 3(b) of Section 65B(44) of the Finance Act. The Petitioner, an establishment in India, a taxable territory and its 100% holding Company, which is the other company in non-taxable territory cannot be considered as establishments so as to treat as distinct persons for the purpose of rendering service.
It was further observed by the HC that Show Cause Notice had been issued without jurisdiction as the same was issued by invoking the extended period of limitation, which was not warranted. Consequently, the petition was ruled to be maintainable under Article 226 of the Constitution of India.
Basis the above observations, the Gujarat HC held that:
Recently, the Maharashtra AAR in the case of Sabre Travel Network India Private Limited [2019 (27) GSTL 754] had held that where a taxpayer provides services to its parent Company abroad merely as facilitation, the same amounts to intermediary service and not export. Therefore, the same would be liable to IGST. The said ruling had created a lot of chaos in the industry as Companies rendering services to its parent Companies abroad were put at a huge disadvantage. The said ruling, however, was partly reversed by the AAAR stating that ascertainment of place of supply is beyond the scope of advance ruling.
It is contemplated that this judgment of the Gujarat HC would settle the position of law that merely being a subsidiary of a Company situated abroad does not exclude the rendering of services by such Company from the definition of ‘export’. Although the instant judgment, pertains to the erstwhile Service Tax Law, it would have a persuasive effect in GST, being a contemporary law. Moreover, this judgment would serve as a reminder to the Revenue Authorities to refrain from subjecting assesses to litigation on baseless allegations, especially by invoking the extended period.
Linde Engineering India Private Limited Other vs. Union of India [R/Special Civil Application No. 12626 Of 2018]
In the wake of COVID-19 pandemic, various countries in the Latin American and Caribbean (‘LAC’) have been facing economic challenges. Further such countries have distanced themselves from their traditional trade partners such as China. Accordingly, in order to get their economy back on track, these countries have enacted certain trade measures.
In one such trade measure, Brazil, Argentina, Colombia and Ecuador have reduced tariff duties to 0% upon import of certain products which inter alia includes articles of apparel / accessories, etc. made out of plastic and other medical equipment such as goggles, safety glasses, protective glasses, etc. classifiable under various sub-headings of chapters 39 and 90 respectively.
Accordingly, in order to capitalize on the opportunity, the Plexcouncil has issued a list of products, where the rate of import duty has been reduced by the said LAC countries. The Council has further requested its members to take necessary action in order to benefit from the tariff elimination to boost India’s exports and also identify export opportunities for harnessing export potential due to slow down and reduced supplies from importing partners of the LAC region.
Although nothing can compensate the loss caused by the COVID-19 pandemic, there has been a silver lining. The countries in the LAC have already broken ties with their traditional importing partners. Similarly, it is contemplated that even European countries would also be soon looking to change their traditional trade partners such as China. Accordingly, the Indian exporters could capitalize on this opportunity to enhance the exports.
The exporters should review their product line to check whether there are any opportunities to enhance their exports in such regions. In case, there are no current benefits available, the Companies could file representations before the appropriate Departments and Ministries requesting that their line of products be given export benefits.
The Petitioner engaged in the business of footwear, procured various raw materials for the manufacture of footwear @ 12% and 18% GST. The manufactured footwears were supplied at the applicable rate of 5% GST. Therefore, in spite of utilization of credit for payment of GST on outward supply, there was accumulation of unutilized credit in electronic credit ledger of the Petitioners.
In such cases of inverted duty structure, where the credit is accumulated on the account of tax rate on inputs being higher than the tax rate on output supplies, Section 54(3) of the CGST Act provides for refund of unutilized input tax credit. The said provision further provides for the quantum of refund which will include credit availed on input services apart from inputs. This is so because the term “input tax” is defined inter alia as tax charged on supply of goods or services or both. ‘Input tax credit’ is defined as the credit of input tax.
Further, Rule 89(5) of the CGST Rules which provides the formula for determining the refund on account of inverted duty structure. The said formula subsequently revised to inter alia exclude the input services from the scope of ‘net input tax credit’ for computation of the refund amount under the Rule. Thus, the substituted Rule 89(5) of the CGST Rules denied refund on the ITC availed on input services and allow relief of refund of ITC availed on inputs alone. In light of the above, the Petitioner challenged the revision of Rule 89(5).
The Gujarat HC observed that Section 7 of the CGST provides that the scope of supply includes all forms of supply of goods or services. Therefore, for the purpose of calculation of refund of accumulated ITC of input services and capital goods arising on account of inverted duty structure is not included into ‘inputs’ as explained vide Circular No. 79/53/2018-GST dated 31 December 2018, wherein it is stated that the intent of law is not to allow refund of tax paid on ‘input services’ as part of unutilised ITC. In this regard, it was observed that the Delhi HC in the case of Intercontinental Consultants & Technocrats Private Limited vs. Union Bank of India [2013 (29) S.T.R.] had held that the Rule which goes beyond the statute is ultra vires and thus liable to be struck down. The said decision was subsequently affirmed by the SC.
Further, referring to the SC’s judgment in Lohara Steel Industries Ltd. v. State of A.P. [(1997) 2 SCC 37], held that the offending portion which is severable can be struck down. Lastly, the Gujarat HC observed that as per provision of Section 54(3) of the CGST Act, the legislature has provided that registered person may claim refund of ‘any unutilised input tax’, therefore, by way of Rule 89(5)of the CGST Rules, such claim of the refund cannot be restricted only to “input” excluding the ‘input services’ from the purview of ITC. Moreover, clause (ii) of proviso to Section 54(3) of the CGST Act also refers to both supply of goods or services and not only supply of goods as per amended Rule 89(5) of the CGST, Rules.
Basis the above observations, the Gujarat HC held that the intent of the Government by framing the Rule restricting the statutory provision cannot be the intent of law as interpreted in the Circular No.79/53/2018 – GST dated 31 December 2018 to deny the registered person refund of tax paid on ‘input services’ as part of refund of unutilised ITC. The HC further opined that Explanation (a) to Rule 89(5) which denies the refund of ‘unutilised input tax’ paid on ‘input services’ as part of ITC accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act. Accordingly, the said explanation to Rule 89(5) was read down to the extent it was ultra vires to Section 54(3).
Accordingly, the HC directed the Respondents to allow the claim of the refund made by the petitioners considering the unutilised ITC of input services as part of the net ITC for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules for claiming refund u/s. 54(3) of the CGST Act.
VKC Footsteps India Private Limited vs. Union of India [R/Special Civil Application No. 2792 of 2019]
This judgment of the Gujarat HC comes as a great relief to various taxpayers who deal in supply of goods or services having inverted duty structure. Those taxpayers who avail services such as job work for the manufacturing of their goods would now be able to avail the refund of the unutilized ITC to full extent. However, as this judgment is limited to the jurisdiction of Gujarat, it is contemplated that the CBIC shall issue a circular clarifying that the refund of unutilized ITC in case of inverted duty structure includes input services as part of the net ITC for the purpose of calculation.
In this 8th volume of our Newsletter - Beyond Facts, we bring you the key developments under various statutes, such as Direct Tax, Indirect Tax, Corporate Law and other allied laws, along with incisive analysis from the GLS team. In this volume, we have covered the recent Notifications, Circulars and Judicial Precedents along with its impact.
Further, the GLS team has also penned down a white paper concept note on EPR laws and regulations.
We hope that reading of the newsletter would bring an enriching experience to you! Your valuable feedback is always welcome.
Madhya Pradesh AAR holds that lifts, being integral part of the building, cannot be construed as ‘plant and machinery’. Accordingly, the Input Tax Credit of tax paid on procurement and instalment of lifts would not be available. The AAR observed that the intent of the legislature is clear to the extent that it intends to restrict input tax credit on any goods or services which are used or intended to be used in construction of immovable property, even when such goods or services or both are used in the course or furtherance of business. Further, there is no ambiguity in the words of the statute to this extent.
The ambiguity regarding the availability of credit in respect of taxes paid in procurement and installation of various goods used in the construction of a building, has been a persistent matter of litigation from the very start of GST in 2017. In fact, such ambiguity was also persistent in the Excise regime. It has been seen that the Advance Ruling authorities have always taken a pro-Revenue stand in interpretation of law.
In regards to availability of credit in respect of goods and services, especially when they are used for construction of immovable property and such immovable property would be further used for providing output services, the reference has to be made to the decision of the decision of Hon’ble Orissa HC in case of Safari Retreats Pvt. Ltd. vs. Chief Commissioner of CGST [WP (C) No. 20463 of 2018] wherein the Orissa HC had allowed such credit in respect of good and services used in construction of mall. Further, the said decision of the HC has been challenged before Hon’ble SC. Accordingly, it would be interesting to see the decision of Hon’ble SC which would put to rest the ambiguity arose in regards to the underlying issue.
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