2018 (9) TMI 885 – GUJARAT HIGH COURT – 2018 (17) G. S. T. L. 3 (Guj.) – Constitutional validity – Transitional Credit – Restriction on migration of Cenvat Credit to GST – Vires of clause(iv) of subsection (3) of section 140 of the CGST Act – CENVAT Credit – purchases made by the First Stage Dealer – As per law existing prior to introduction of GST, the first stage dealers like the petitioners are not burdened with the excise duty component, and no time restrictions existed – petitioner is aggrieved by the provisions contained in Clause(iv) of sub-section(3) of section 140 of the CGST Act which provides that such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day. This condition would limit the eligibility of a first stage dealer to claim credit of the eligible duties in respect of goods which were purchased from the manufacturers prior to twelve months of the appointed day.
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Whether the impugned provision mak
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other words, the parliament also has wide powers to frame the laws including taxing statutes with retrospective effect. However, the Courts have recognized certain inherent limitations in framing retrospective tax legislations.
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The legislature (after transition to GST Regime) recognized the existing rights and largely protected the same by allowing migration thereof in the new regime. In the process, however, a condition was imposed to enable the assessees in the nature of first stage dealer such as the present petitioner-company viz. that the invoices or other prescribed documents on the basis of which credit was claimed were issued not earlier than twelve months immediately preceding the appointed day. In effective terms, this condition restricted the enjoyment of existing credit in respect of goods purchased not prior to one year of the appointed day. In relation to all goods purchased prior to such day, no credit would be available under the credit ledger to be maintained und
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s in relation to purchases made prior to one year from the appointed day. No such restriction existed in the prior regime. Merely the stated grounds in the affidavit in reply that the provision is introduced since physical identification of goods is necessary so as to ensure that the first stage dealers do not take any undue advantage of such benefit and also to accommodate the administrative convenience would not be sufficient.
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The benefit of credit of eligible duties on the purchases made by the first stage dealer as per the then existing CENVAT credit rules was a vested right. By virtue of clause (iv) of sub-section (3) of section 140A such right has been taken away with retrospective effect in relation to goods which were purchased prior to one year from the appointed day. This retrospectivity given to the provision has no rational or reasonable basis for imposition of the condition. The reasons cited in limiting the exercise of rights have no co-relation with the advent of
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petitions arise in similar background. For convenience, we may record facts from Special Civil Application No.18433/2017. 2. Petitioner no.1 is a company registered under the Companies Act and would here-in-after be referred to as the petitioner company . Petitioner no.2 is the Director of the company. Petitioner company is engaged in trading of specialized industrial bearings of various types. The petitioner also imports certain goods. Under the old regime, i.e. before introduction of Goods and Service Tax, the excise duty on local goods or the countervailing duty paid on imports was not to be borne by the petitioners. The credit could be utilised for payment of tax. According to the petitioners, the company has to maintain sufficient stock of different kinds of such bearings, many of which items may not be immediately sold. The petitioners would therefore, have longer cycle of such goods remaining with the petitioners after purchasing from the manufacturer before they are sold. 3. Be
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omponent. We would advert to these provisions in detail at a later stage. Suffice it to record at this stage that as long as the petitioners fulfill the necessary conditions provided in the said Rules of 2004, the petitioners could pass on the credit of the duty paid on the purchases to their purchasers-manufacturers. 4. The Union legislature framed different laws to usher in the GST regime in substitution of the existing Central Excise and Value Added tax provisions and certain other taxing statutes. The Central Goods and Services Tax Act, 2017 ( CGST Act for short) was brought into effect from 1.7.2017. Section 9 thereof is a charging section providing for levy and collection of tax. Sub-section(1) of section 9 authorises collection of tax called the central goods and service tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption at the prescribed rates not exceeding twenty per cent to be paid by the taxable person
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as aggrieved the petitioners and the constitutional validity thereof is challenged before us. 5. Case of the petitioners in nutshell is that prior to enactment of IGST Act, the petitioner company as a first stage dealer was not burdened with the excise duty paid on the purchases and this was without any restriction on time during which the goods must be sold. In earlier regime, the first stage dealers were put at part with manufacturers. A registered manufacturer could avail CENVAT credit of tax paid on purchases which could be utilized towards duty liability of goods manufactured by him. As against this, a first stage dealer or an importer could pass on the credit of tax paid on their purchases to the customers who could utilize such credit against their duty liability on product manufactured by them. Clause(iv) of sub-section(3) of section 140 of the CGST Act has now imposed a condition for availing of such a benefit which not only acts harshly and unjustly to the petitioners and oth
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e advantage of such benefit and so as to accommodate the administrative convenience, the stature has provided for the restriction of 12 months. The petitioners' case was also distinguished from the case of an unregistered dealer by pointing out that under section 140 of the CGST Act, limited benefits have been granted to unregistered dealers. 7. In background of such facts and pleadings, learned counsel Shri Uchit Sheth for the petitioners raised the following contentions : 1) In the earlier regime, the first stage dealers were put at the same position as the manufactures by removing the burden on such dealers of the duty on manufacture. Under sub-section(3) of section 140 of the CGST Act in respect of goods purchased by a first stage dealer from the manufacturer prior to one year, the dealer is put in disadvantageous position. 2) The distinction drawn in case of the first stage dealer is arbitrary and discriminatory. The first stage dealers are not accorded the same treatment as i
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VAT credit which could be utilised for discharge of duty liabilities. Such benefit is withdrawn in respect of goods which are purchased or imported one year before. The law thus acts with retrospective effect. There is no plausible reason or logic provided for making such retrospective tax legislation. 5) In support of his contentions, counsel relied on the following judgments : i) Decisions in case of Eicher Motors Ltd. v. Union of India reported in 1999 (106) ELT 3 (SC) and in case of Collector of Central Excise, Pune v. Daiichi Karkaria Ltd. reported in 1999 (112) ELT 353 (SC) were cited to contend that CENVAT credit is form of a duty paid by the concerned person and therefore, such benefit cannot be withdrawn with retrospective effect. For the same purpose, reference was also made to the decisions of Supreme Court in case of Jayaswal Neco Ltd. v. Commissioner of Central Excise, Raipur reported in 2015 (322) ELT 587 (SC) and in case of Commissioner of Central Excise, Patna v. New Sw
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ary, we would refer to these judgments at an appropriate stage. 8. On the other hand, learned ASGs Shri Jaimin Gandhi and Ms. Trusha Patel opposed the petitions. Their contentions were : 1) In taxing statutes, parliament has much greater latitude. The Court would not expect precise or scientific division before approving the classification. 2) It is not a case of hostile discrimination. First stage dealers form a special class. Their position cannot be compared either with the manufactures. 3) Allowing CENVAT credit is in the nature of a concession granted to an assessee and is always made subject to conditions imposed by the legislature. The legislature in its wisdom has made enjoyment of right to take CENVAT credit conditional on fulfilling the conditions which is within the competence of the parliament to do. The petitioners had no vested right to claim the benefit. 4) Putting a reasonable restriction on enjoying such a right would not amount to taking away any vested right with ret
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lls on the dealer, he may, if the law permits, pass it on to the purchaser, however, it is not necessary that the taxing statute must permit it and the tax cannot be declared invalid merely because the provision does not permit the dealer to pass it on purchaser: a) M/s.J.K. Jute Mills Co. Ltd. v. State of Uttar Pradesh and another reported in AIR 1961 Supreme Court1534. b) Konduri Buchirajalingam v. The State of Hyderabad and others reported in AIR 1958 Supreme Court 756. c) Associated Cement Co. Ltd. Tamil Nadu v. State of Tamil Nadu and another reported in (1974) 4 Supreme Court Cases 422. iii) In support of the contention that merely because the classification leads to disadvantage to the petitioners itself is not a ground to invalidate the statute, reliance was placed on the decision of Supreme Court in case of State of Bihar and others v. Sachchidanand Kishore Prasad Sinha and others reported in (1995) 3 Supreme Court Cases 86. iv) In support of the contention that a taxing statu
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onstitutional. vii) Referring to the decisions in case of R.K. Garg v. Union of India and others reported in (1981) 4 Supreme Court Cases 675 and in case of Government of Andhra Pradesh and others v. Smt. P. Laxmi Devi (SMT) reported in (2008) 4 Supreme Court Cases 720, it was argued that State collects tax in exercise of its eminent domain and wisdom of legislature is therefore, not amenable to judicial review. viii) Our attention was drawn to the decision of Supreme Court in case of Osram Surya (P) Ltd. v. Commissioner of Central Excise, Indore reported in (2002) 9 Supreme Court Cases 20, in which first proviso to Rule 57-G of the Modvat Credit Rules was challenged. With introduction of said proviso, a manufacturer would not be allowed to take the modvat credit after six months from the date of the documents specified in the said proviso. Supreme Court while upholding the validity of the provision held that same does not take away a vested right. 9. On the basis of submissions made b
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e excise duties paid by him. Clause (ij) of Rule 2 of the Rules of 2004 define the term first stage dealer as under : (ij) first stage dealer means a dealer, who purchases the goods directly from,- (i) the manufacturer under the cover of an invoice issued in terms of the provisions of Central Excise Rules, 2002 or from the depot of the said manufacturer, or from premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer, under cover of an invoice; or (ii) an importer or from the depot of an importer or from the premises of the consignment agent of the importer, under cover of an invoice; 12. Sub-rule(1) of Rule 3 of the Rules of 2004 empowered a manufacturer or producer of final products or a provider of input service to take CENVAT credit of the excise duty and other duties specified therein. Rule 9 inter-alia provided that CENVAT credit shall be taken by the manufacturer on the basis of
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uch input or capital goods and only an amount of such duty on pro rata basis has been indicated in the invoice issued by him : Provided that provisions of this sub-rule shall apply mutatis mutandis to an importer who issues an invoice on which CENVAT credit can be taken. 13. As per sub-rule(8) of Rule 9, a first stage dealer or a second stage dealer had to submit within fifteen days from the close of each quarter of a year to the Superintended of Central Excise, a return in the form specified by notification by the Board. In terms of the said rules, thus the incident of duty on manufactured goods was not to be borne by first stage dealer. 05.09.2018 14.With the introduction of GST replacing several taxing statutes, it became necessary to make provisions for switching over from the old to the new regime which, in legal parlance, often times, is referred to as transitional provisions. Such transitional provisions are contained in Chapter XX of CGST Act. As noted, as per sub-section (1) o
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a second stage dealer or a registered importer or a depot of a manufacturer, shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:- (i) such inputs or goods are used or intended to be used for making taxable supplies under this Act; (ii) the said registered person is eligible for input tax credit on such inputs under this Act; (iii) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs; (iv) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day; and (v) the supplier of services is not eligible for any abatement under this Act: Provided that where a registered person, other than a manufacturer or a supplier of
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nted day. This condition would limit the eligibility of a first stage dealer to claim credit of the eligible duties in respect of goods which were purchased from the manufacturers prior to twelve months of the appointed day. 16.While considering the rival contentions with respect to the constitutionality of this provision, we may broadly refer to the contours of the Court's powers in holding a law made by the legislation as unconstitutional and the limits of such powers. In case of Budhan Choudhry and ors vs. State of Bihar reported in AIR 1955 Supreme Court 191, seven Judge Bench of the Supreme Court held and observed that when Article 14 forbids class legislation, it does not forbid reasonable classification. However, for the classification to be reasonable, two conditions must be fulfilled viz. (i)that the classification must be founded on a intelligible differentia which distinguishes persons or things that are grouped together from this legal difference of the credit and (ii)
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sh that the protection of the equal opportunity clause has been denied to them, it is not enough for the petitioners to say that they have been treated differently from others, not even enough that a differential treatment has been accorded to them in comparison with other similarly circumstanced. Discrimination is the essence of classification and does violence to the constitutional guarantee of equality only if it rests on an unreasonable basis. 18. On the question of the grounds on which a law framed by the legislation i.e. the parliament of the State assembly the decision of three Judge Bench of Supreme Court in case of State of A.P. And ors vs. Macdowell and Co. and ors reported in (1996) 3 SCC 709 held the field and was often referred. In the said judgement, the Supreme Court had opined that the grounds for striking down a statute framed by the legislature are only two viz. (1) lack of legislative competence, or (2) violation of fundamental rights or any other constitutional prov
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em. The Court cannot sit on the judgement over their wisdom. 19.In the recent judgement of the Supreme Court in case of Shayra Bano vs. Union of India and ors reported in (2017) 9 SCC 1, Rohinton Fali Nariman, J., however, expressed a somewhat different view. It was observed that a statute can also be struck down if it is manifested arbitrary. It was observed as under: 101. It will be noticed that a Constitution Bench of this Court in Indian Express Newspapers v. Union of India, (1985) 1 SCC 641, stated that it was settled law that subordinate legislation can be challenged on any of the grounds available for challenge against plenary legislation. This being the case, there is no rational distinction between the two types of legislation when it comes to this ground of challenge under Article 14. The test of manifest arbitrariness, therefore, as laid down in the aforesaid judgments would apply to invalidate legislation as well as subordinate legislation under Article 14. Manifest arbitra
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. Union of India and ors (supra) it was observed as under: 8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrine or straight jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislature judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Dond 354 US 45
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ice adoption of remedy are not always possible and that "judgment is largely a prophecy based on meagre and un-interpreted experience". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There, may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Reig Refining Company 94 Lawyers Edition 381 be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and
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frame the laws including taxing statutes with retrospective effect. However, the Courts have recognized certain inherent limitations in framing retrospective tax legislations. 22. In Tata Motors Ltd vs. State of Maharashtra and ors reported (2004) 5 SCC 783, it was observed that it is undoubtedly true that the legislature has the powers to make laws retrospectively including tax laws. Levies can be imposed or withdrawn but if a particular levy is sought to be imposed only for a particular period and not prior or subsequently, it is open to debate whether the statute passes the test of reasonableness at all. 23. In Commissioner of Income Tax vs. Vatika Township petitioner. Ltd reported in 367 ITR 466 the Constitution Bench of the Supreme Court observed as under: 31. Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea
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;fairness , which must be the basis of every legal rule as was observed in the decision reported in L Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co.Ltd[4]. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this legal position was conceded by the counsel for the parties. In any case, we shall refer to few judgments containing this dicta, a little later. 33. We would also like to point out, for the sake of completeness, that where a benefit is conferred by a legislation, the rule against a retrospec
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be held to be retrospective in nature. However, we are confronted with any such situation here. 24.In case of Jayam and Co. vs. Assistant Commissioiner and anr. reported in (2016) 15 SCC 125, the Supreme Court noted as approval observations made in case of R.C.Tobacco (P.) Ltd vs. Union of India reported in (2005) 7 SCC 725 as under: 14. With this, let us advert to the issue on retrospectivity. No doubt, when it comes to fiscal legislation, the Legislature has power to make the provision retrospectively. In R. C. Tobacco Pvt. Ltd. v. Union of India, this court stated broad legal principles while testing a retrospective statute, in the following manner: "(i) A law cannot be held to be unreasonable merely because it operates retrospectively; (ii) The unreasonability must lie in some other additional factors; (iii) The retrospective operation of a fiscal statute would have to be found to be unduly oppressive and confiscatory before it can be held to be unreasonable as to violate cons
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e of the imported goods would be shifted from the petitioner-company as first stage dealer. Duty element suffered on the goods purchased from manufacturers would be neutralized at the time of sale of such goods by the dealer. In case of Eicher Motors Ltd vs. Union of India (supra), the Supreme Court considered the nature of Modvat credit and observed that if on the inputs the assessee had already paid the taxes on the basis that when the goods are utilized in the manufacture of further products as inputs thereto, then the tax on these goods get adjusted which are finished subsequently. The Court therefore held that a right accrued to the assessee on the date when the paid tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. This concept was further elaborated by the Supreme Court in case of Collector of Central Excise, Pune vs. Dai Ichi Karkaria Ltd (supra) observing that it is clear from
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reported in 2014 (310) ELT 833 Guj Division Bench of this Court was considering vires of Rule 8 (3A) of the Central Excise Rules, 2002 which provided that if an assessee defaults in payment of duty beyond thirty days from the date prescribed under subrule (1) then notwithstanding anything contained in the sub-rule(1), the assessee shall pay excise duty for each consignment at the time of removal without utilizing the CENVAT credit till the assessee pays the outstanding amount including interest. The Court while striking down such Rule unconstitutional observed as under: 31.This extreme hardship is not the only element of unreasonableness of this provision. It essentially prevents an assessee from availing cenvat credit of the duty already paid and thereby suspends, if not withdraws, his right to take credit of the duty already paid to the Government. It is true that such a provision is made because of peculiar circumstances the assessee lands himself in. However, when such provision m
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neously once the input is received in the factory of the manufacturer of the final product and the final product which had been cleared from the factory was sought to be lapsed. The Supreme Court struck down the rule further observing that if on the inputs the assessee had already paid the taxes on the basis that when the goods are utilized in the manufacture of further products as inputs thereto then the tax on those goods gets adjusted which are finished subsequently. Thus a right had accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. We may also recall that in the case of Dai Ichi Karkaria Ltd (supra) it was reiterated that a manufacture obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable produce immediately it makes the requisite declaration and obtains an acknowledgment th
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ler such as the present petitioner-company viz. that the invoices or other prescribed documents on the basis of which credit was claimed were issued not earlier than twelve months immediately preceding the appointed day. In effective terms, this condition restricted the enjoyment of existing credit in respect of goods purchased not prior to one year of the appointed day. In relation to all goods purchased prior to such day, no credit would be available under the credit ledger to be maintained under the CGST Act. Such credit would be lost. Undoubtedly, therefore, this condition has retrospective operation and takes away an existing right. This by itself may not be sufficient to hold the provision as ultra vires or unconstitutional. However, in addition to these findings, we also find that no just reasonable or plausible reason is shown for making such retrospective provision taking away the vested rights. Had the statutory provision given a time limit from the appointed day for utilizat
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cturing duty. No time frame of the past dealings was envisaged under such rules. The same grounds of physical identification of goods preventing undue advantage being taken and the administrative convenience would exist even then. Secondly, no limitation of time is prescribed in the proviso to sub-section (3) of section 140 where a dealer is not in possession of any invoice or any other document evidencing payment of duty in respect of inputs in which case credit at the prescribed rate would be granted. 28. The judgement of the Supreme Court in case of Osram Surya (petitioner) Ltd vs. Commissioner of Central Excise, Indore reported in (2002) 9 SCC 20 involved different facts. It was a case in which, first provisio which was introduced in Rule 57-G of the MODVAT Credit Rules was challenged. By virtue of this provisio a manufacturer would not be allowed to take MODVAT credit after six months from the date of the documents specified therein. It was on this background the Supreme Court had
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are of the opinion that the benefit of credit of eligible duties on the purchases made by the first stage dealer as per the then existing CENVAT credit rules was a vested right. By virtue of clause (iv) of sub-section (3) of section 140A such right has been taken away with retrospective effect in relation to goods which were purchased prior to one year from the appointed day. This retrospectivity given to the provision has no rational or reasonable basis for imposition of the condition. The reasons cited in limiting the exercise of rights have no co-relation with the advent of GST regime. Same factors, parameters and considerations of in order to co-relate the goods or administrative convenience prevailed even under the Central Excise Act and the CENVAT Credit Rules when no such restriction was imposed on enjoyment of CENVAT credit in relation to goods purchased prior to one year. 31. In the conclusion we hold that though the impugned provision does not make hostile discrimination bet
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