DCIT, NEW DELHI vs. M/S RAYBAN SUN OPTICS INDIA LTD.,, BHIWANI

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘I-1’ : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER and SHRI KULDIP SINGH, JUDICIAL MEMBER (THROUGH VIDEO CONFERENCE) ITA No.1727/Del./2016 (ASSESSMENT YEAR : 2007-08) M/s. RayBan Sun Optics India Ltd., vs. ACIT, Circle 2(1), SP 810 – 811, RIICO Industrial Area, New Delhi. Phase – II, Bhiwadi – 301 019 District Alwar, Rajasthan. (PAN : AABCR8209G)

ITA No.1619/Del./2016 (ASSESSMENT YEAR : 2007-08) ACIT, Circle 2(1), vs. M/s. RayBan Sun Optics India Ltd., New Delhi. SP 810 – 811, RIICO Industrial Area, Phase – II, Bhiwadi – 301 019 District Alwar, Rajasthan. (PAN : AABCR8209G) (APPELLANT) (RESPONDENT)

ASSESSEE BY : Shri Nageshwar Rao, Advocate Shri Purushottam Anand, Advocate REVENUE BY : Shri Anupam Kant Garg, CIT DR

Date of Hearing : 22.12.2020 Date of Order : 22.01.2021

O R D E R PER KULDIP SINGH, JUDICIAL MEMBER :

2 ITA No.1727/Del./2016 ITA No.1619/Del./2016 Present cross appeals filed by the assessee as well as by the

revenue are being disposed off by way of composite order to avoid

repetition of discussion.

(hereinafter referred to as ‘the taxpayer’) by filing the present

appeal sought to set aside the impugned order dated 29.01.2016

passed by the Assessing Officer (AO) in consonance with the

orders passed by the ld. DRP/TPO under section 143 (3) read with

section 144C / 92CA(4) of the Income-tax Act, 1961 (for short ‘the

Act’) qua the assessment year 2007-08 on the grounds inter alia

that :-

“Re: General Grounds 1. That on the facts and circumstances of the case and in law, Assessing Officer ("Ld. AO") erred in assessing the income of the Appellant at INR 195,817,1401- as against the returned income of INR 192,663,625/-. 2. That on the facts and circumstances of the case and in law, the impugned order passed by Ld. AO in pursuance to the directions of the Hon'ble Dispute Resolution Panel - II (Hon'ble DRP"), under section 143(3) read with section 144C of the Income-tax Act, 1961 (the Act"), is bad in law and void ab-initio. Re: Transfer Pricing Adjustment in respect of Advertisement, Marketing and Promotion Expenses ("AMP Expenses") 3. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO/Ld. Transfer Pricing Officer (Ld. TPO") erred in enhancing the income of the Appellant by INR 315,3519/- by making a Transfer Pricing (“TP") adjustment on account of AMP expenses incurred by the Appellant in the regular course of its business on the ground that it was excessive and should be reimbursed by the Associated Enterprises ("AE"). Re : No Transaction much less than an International Transaction

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3.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO/Ld. TPO erred in assuming that the AMP expenditure incurred by the Appellant is an "international transaction" within the meaning of the term as contained in section 92B of the Act. In doing so, the Hon'ble DRP/Ld. AO/Ld. TPO failed to appreciate that there are no machinery provisions under the Indian TP regulations for determination of AMP expenditure as an international transaction. 3.2 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO/Ld. TPO erred in holding that the AMP expenditure incurred by the Appellant is an international transaction by merely relying upon the decision of the Sony Ericsson Mobile Communications India Pvt Ltd vs. CIT ([2015] 374 ITR 118) and without appreciating that unlike the facts of the case in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra), the Appellant had -(a) neither received any subsidy I grant in connection with AMP expenses from its AE; and (b) nor the Appellant had admitted to the existence of an international transaction. 3.3 That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble DRP has erred in not appreciating that the AE of the Appellant did not derive any benefit from the AMP expenditure incurred by the Appellant. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble DRP erred in not appreciating that the AMP expenses were incurred by the Appellant as a part of its role and responsibility as a manufacturer cum distributer and not for the purpose of providing any benefit to its AE and thus could not be considered to be a transaction under section 92F(v) of the Act, in the absence of any understanding or arrangement or action in concert for any provision of service. Re : No arrangement / Agreement / Understanding / Contract with AE's 3.4 The Hon'ble DRP/Ld. AO/Ld. TPO grossly erred on facts and in law in not appreciating that AMP expenditure incurred by the Applicant at its own behest could not be regarded as a 'transaction', much less than an international transaction under section 92B of the Act, in the absence of any understanding arrangement! agreement between the Appellant and its AEs (which own the trademarks) for incurrence of extraordinary/excessive AMP expenditure by the Appellant for developing marketing intangibles for the AE. Re: "Bright Line" Method has been rejected by the Delhi High Court in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. Vs. CIT -III. (ITA No.16/2014) and other appellants in the High Court of Delhi. 3.5 That on the facts and circumstances of the case and in law, Hon'ble DRP has erred in comparing the AMP/GP ratio of the Appellant with that of the comparable companies for the purpose of determining the value of the international transaction of AMP. In

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doing so, the Hon'ble DRP has applied a bright line test and failed to consider the findings of Sony He order according to which bright line test has no statutory mandate.

Re: Disallowance of Selling Expenses 3.6 That the Hon'ble DRP/Ld. AO/Ld. TPO grossly erred in facts and in law in by not appreciating that the AMP expense considered by the Hon'ble DRP/Ld. AO/Ld. TPO for AMP adjustment are primarily in the nature of at "point of sale expenditure" and thus are in the nature of selling expenses. 3.7 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO/Ld. TPO failed to appreciate that ambit of "selling expenses" is not only limited to trade discount/ volume discount, rather, any expense(s) which have been incurred for the purposes of enhancing sales will fall under the purview of "selling expenses".

Re: De-Bundling of Transaction(s) not appropriate in the instant case

3.8 The learned Hon'ble DRP/Ld. AO/Ld. TPO have erred in not appreciating that since the entity-level operating margin earned by Appellant under transactional net margin method (TNMM') is higher than the comparable companies as duly accepted by learned TPO, no adjustment is warranted on account of any excessive/ non routine AMP expenses.

3.9 That the Hon'ble DRP erred in alleging that benchmarking of AMP expenses cannot be undertaken using aggregated approach along with other international transactions due to non-availability of comparable companies with similar functional profile and AMP intensity.

3.10 Without prejudice to the above, even if a segregated approach was to be followed, the Hon'ble DRP/Ld. AO/Ld. TPO erred by no attributing any revenue to the alleged transaction of AMP expenditure as required by the Hon'ble High Court in the case of Sony Ericsson Mobile Telecommunications India Private Limited (supra). 3.11 That the Hon'ble DRPI Ld. TPO/Ld. AO erred in not allowing the benefit of "set off' to the Appellant by adjusting the excessive margin earned by the Appellant in the other business segments against the cost incurred on account of AMP expenditure treated as segregated transaction. This is in contradiction to the decision of the Hon'ble High Court in the case of Sony Ericsson Mobile Telecommunications India Private Limited (supra) wherein it was held that TPO can segregate AMP expense as international transaction only after giving benefit of "set off', 3.12 That the Hon'ble DRP/Ld. AO/Ld. TPO erred in facts and in law, in concluding that the non-routine functions (being the alleged excessive AMP expenditure) amounted to a 'service' being rendered

5 ITA No.1727/Del./2016 ITA No.1619/Del./2016 by the Appellant to its AE and that a mark-up was required to be charged in respect of such services. 3.13 That the Hon'ble DRP/Ld. AO/Ld. TPO erred in facts and in law, in applying the gross profit ratio earned by the comparable companies as a mark-up on AMP expenses for the purposes of computing the adjustment. Re: Consequential Grounds 4. That on the facts and circumstances of the case, Ld. AO erred in initiating penalty proceedings under section 271 (1)(c) of the Act..”

referred to as ‘the Revenue’) by filing the present appeal sought to

set aside the impugned order dated 29.01.2016 passed by the

Assessing Officer (AO) in consonance with the orders passed by

the ld. DRP/TPO under section 143 (3) read with section 144C /

92CA(4) of the Income-tax Act, 1961 (for short ‘the Act’) qua the

assessment year 2007-08 on the grounds inter alia that :-

“1. Whether the DRP was justified in not appreciating the fact that bright line is a mere step (of the most appropriate method for benchmarking the AMP services) carried out to estimate and bifurcate expenditure pertaining to the taxpayer for its own routine distribution function and the expenditure incurred on AMP service provided to the AE in the situation where the assessee has not reported the international transaction pertaining to marketing function? 2. Whether under the facts and circumstances of the case and in law the Hon'ble DRP was correct in holding that PLR cannot be the basis for computing markup on AMP expenses without appreciating the Revenue's case wherein the PLR of banks has been used as an uncontrolled comparable to benchmark the opportunity cost of money involved and locked up in AMP expense? 3. Whether in the facts and circumstances of the case and in law the DRP was justified in expenses (disregarding the fact that these expenses would not form part of AMP intangible) even while the same is a factor for comparability analysis as different entities account for such expenditure under different heads?”

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that there is a delay of 38 days in filing the appeal before the

Tribunal and sought to condone the delay. Keeping in view the

reasonable cause given in the application, the delay of 38 days in

filing the present appeal is hereby condoned.

transfer pricing of Advertising, Marketing & Promotional (AMP)

expenses was set aside to the file of AO for deciding afresh by the

coordinate Bench of the Tribunal in ITA No.5282/Del/2011 vide

order dated 09.08.2012 by determining following findings :-

“5. We have heard rival contentions and gone through the relevant material available on record. The assessee has raised a legal plea that the issue of AMP expenses is not covered by Section 92B(1) explanation (d) as they do not amount to provision of services and are actually arrangement of expenses. As the assessee and other enterprises are claimed to have separate agreements about the arrangements of advertisement and sales promotion expenses. It will be desirable that this aspect is taken into consideration. In view of these facts, we set aside this issue back to the file of the Assessing Officer for decision afresh in accordance with law.”

controversy at hand are : The taxpayer was engaged in

manufacturing and distribution of RAYBAN brand sunglasses and

prescription frames in India and to carry out manufacturing

operation, the taxpayer imported certain raw material and

components from Luxottica Group entities for manufacturing of

7 ITA No.1727/Del./2016 ITA No.1619/Del./2016 finished sunglasses in India. In addition and for the distribution

operation, the taxpayer also imported finished Rayban branded

sunglasses and other luxury brand sunglasses from Luxottica

Group entities for sale to independent third party dealers/

distributors in India. Ld. TPO while examining the Transfer

Pricing (TP) study made by the taxpayer noticed that huge

expenditure has been made by the taxpayer towards AMP in brand

building and marketing of Rayban products in India for which it

sought to be compensated with minimum certain amount. In the

earlier order dated 27.10.2010, ld. TPO noticed from the annual

report of the Associated Enterprises (AE) that sales, gross profit

and operating income of AE has been increasing over the past 5

years i.e. from 2003 to 2007 and the benefit of this expenditure

incurred on AMP is flowing from the Luxottica Group and thereby

held that AMP expenditure of Rs.8.38 crores as an international

transaction under section 92B(1) read with clause (v) of section

92F of the Act.

and channel discount amounting to Rs.3.90 crores and sale of

licence of brand of sunglasses amounting to Rs.40.80 lacs

considered the AMP expenditure to Rs.4.07 crores and taken this

amount for benchmarking its Arm’s Length Price (ALP). Ld. TPO

8 ITA No.1727/Del./2016 ITA No.1619/Del./2016 discussed the concept of marketing intangibles in the light of the

OECD Guidelines. After dealing with the contentions raised by the

taxpayer, ld. TPO reached the conclusion that :-

“since no independent company operating in completely uncontrolled situation would have agreed to incur such excessive AMP expenditure i.e 15% of the total sales for a brand not owned by it without either earning supernormal profits or getting compensated by the brand owner, the AE has apparently benefited in terms of the enhanced value of the intangibles i.e. brand owned by it.”

for benchmarking the expenditure on AMP taken 4 comparables

and computed the bright line limit of 0.22% in terms AMP

expenditure/sales as under :-

Value of Gross Sales 70.83 crs. AMP/Sales of the comparables 0.22% Amount that represent bright line 0.16 crs. Expenditure on AMP by assessee 4.07 crs. Expenditure in excess of bright line 3.91 crs.

on independent search by taking companies engaged in

advertisement, publicity and allied services and computed the

average mean of 13.04% as under :-

9 ITA No.1727/Del./2016 ITA No.1619/Del./2016 S.No. Company Name OP/Cost 1 Rockman Advertising & Mktg. (India) Ltd. 35.13% 2 Cybermedia India Online Ltd. 22.70% 3 Gokimine Advertising Ltd. 3.56% 4 Marketing Consultants & Agencies Ltd. 14.96% 5 Needwise Advertising Pvt. Ltd. 1.59% 6 Adbur Pvt. Ltd. 0.30% Mean 13.04%

reimbursement as under :-

Particulars Formula Amount in Rs. in Crores Total Revenue of the assessee A 70.83 Arm’s length % of AMP Expenditure B 0.22% Arm’s length AMP expenditure C=(A*B) 0.16 Expenditure incurred by the assessee D 4.07 on AMP Expenditure incurred for developing E=D-C 3.91 the intangibles Add Markup © 13.04% F 0.51 Arm’s length price of the G=E+F 4.42 reimbursement Reimbursement on AMP expenses H 0 received The amount of reimbursement on AMP G-H 4.42 in be upwardly adjusted

11.2 An upward adjustment of Rs.4.42 Crs is to be made to the income of the assessee, being the difference between the arm’s length price of reimbursement of AMP expenses and the reimbursement of AMP expenses received by the assessee from its AEs i.e. the Assessing Officer shall enhance the income of the assessee by an amount of Rs.4.42 crs. While computing its total income, the Assessing Officer may examine feasibility of initiating penalty proceedings u/s 271(1)(c) of the Act in accordance with Explanation 7 of the same.”

the Tribunal, ld. TPO examined the Agreement dated 22.04.2008.

10 ITA No.1727/Del./2016 ITA No.1619/Del./2016 The taxpayer intimated that the taxpayer has not entered into any

specific agreement with its AE for undertaking AMP expenses for

brands owned by the AEs and the AMP expenditure amounting to

Rs.44,733,369 incurred by the taxpayer for AY 2007-08 were

incurred for its own business promotion and sale of eyewear

products manufactured and imported by it from AEs. The taxpayer

further stated that it has only entered into licence distribution

agreement with its AE on 22.04.2008.

not been able to produce any agreement for the relevant previous

year as claimed for before the Tribunal, there is no change in the

facts and law regarding the issue and ratified upward adjustment of

Rs.4.21 crores made by the ld. TPO vide order dated 22.01.2016 to

the income of the taxpayer.

of filing the objections who has partly allowed the objections. Ld.

TPO passed order dated 22.01.2016 giving effect to the directions

of the ld. DRP and computed the AMP adjustment to

Rs.31,53,519/- as against Rs.4,21,00,000/- proposed by the TPO in

the order passed u/s 92CA (3) of the Act. The Assessing Officer

(AO) accordingly framed the assessment at an income of

Rs.19,58,17,140/- u/s 143(3)/144C/92CA (4) of the Act. Feeling

11 ITA No.1727/Del./2016 ITA No.1619/Del./2016 aggrieved, both the taxpayer as well as the Revenue has come up

before the Tribunal by way of filing the present cross appeals.

parties to the appeal, gone through the documents relied upon and

orders passed by the Revenue authorities below in the light of the

facts and circumstances of the case.

AMP expenses incurred by the taxpayer by using Bright Line Test

(BLT) by comparing alleged excessive AMP expenses with that of

the comparables. However, ld. DRP has overruled this issue taken

by the TPO in the light of the judgment of the Hon’ble Delhi High

Court rendered in Sony Ericsson Mobile Communications

India Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del.) and directed

the TPO to exclude routine selling and distribution expenses in

view of the findings returned by the Hon’ble Delhi High Court in

Sony Ericsson Mobile Communications India Pvt. Ltd. (supra).

could not propose suitable comparables for using aggregated

approach, ld. DRP proceeded to apply segregation approach of the

routine selling expenses from the AMP expenses would be required

so as to make reasonable assessment of the benefits to the AE on

account of such expenses. The factum of setting aside the BLT

12 ITA No.1727/Del./2016 ITA No.1619/Del./2016 method by the ld. DRP adopted by the TPO has been challenged by

the Revenue by filing cross appeal.

DRP and after entertaining the submissions made by the AO

considered the expenses being part of the AMP as under :-

Particulars Amount (in INR) Amount (in INR) FY 2010-11 as per FY 2010-11 TP order considered as AMP by the TPO post DRP’s directions Advertisement 4,06,53,036 4,06,53,036

of AMP expenditure in case of the taxpayer and comparables as

under :-

S. Comparable company Gross AMP to AMP to GP to No. profit sales GP COGS to sales 1 A C I Infocom Ltd. 4.61 0.00 0.00 4.83 2 Compuage Infocom Ltd. 12.03 0.00 0.00 13.67 3 C C S Infotech Ltd. – 3.61 1.47 40.76 3.74 Trading segment 4 Priya Ltd. – Electronics 14.08 0.03 0.22 16.01 segment Average 8.58% 0.38% 10.24% 9.56% Tested party 52.06% 5.74% 11.02%

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on account of AMP as under :-

Excess AMP (A) 28,78,349 Mark up (B) @ 9.56% 2,75,170 AMP Adjustment (C=A+B) 31,53,519

as applied by the ld. TPO is concerned, Hon’ble Delhi High Court

in Sony Ericsson India Pvt. Ltd. v. CIT (2015) 374 ITR 118 (Del.)

and subsequently in Maruti Suzuki India Ltd. v. CIT (2016) 328

ITR 210 (Del.) has categorically held that BLT is not a valid basis

for determining the existence of international transaction or for that

matter for computing the ALP of such international transaction

involving AMP expenses, the order of TPO passed by making BLT

as basis of the ALP adjustment is not sustainable in the eyes of

law.

decisions viz. Bausch & Lomb Eye Care (India) Pvt. Ltd. v.

Additional CIT (2016) 381 ITR 227 (Del.) and Honda Siel Power

Products Ltd. v. Dy. CIT (2016) 237 Taxman 304 held that it is for

14 ITA No.1727/Del./2016 ITA No.1619/Del./2016 the Revenue to firstly discharge the onus to prove the existence of

an international transaction between the taxpayer and its AE and

only thereafter ALP of international transactions involving AMP

can be computed.

the BLT, the existence of international transactions cannot be

proved and as such, adjustment made by the TPO in the aggregate

of any excessive/non-routine expenses is not in consonance with

the ratio laid down in Sony Ericsson Mobile Communications

India Pvt. Ltd. (supra).

in comparing the AMP / GP ratio of the taxpayer vis-à-vis

comparable company for the purpose of determining the value of

the international transactions of AMP is nothing but applying the

BLT which has no statutory mandate, as has been held by Hon’ble

Delhi High Court in Sony Ericsson Mobile Communications

India Pvt. Ltd. (supra) and Maruti Suzuki India Ltd. v. CIT

(supra).

upon Sony Ericsson Mobile Communications India Pvt. Ltd.

(supra), ld. DRP/AO/TPO cannot presume the existence of

international transactions qua AMP expenditure as the taxpayer has

15 ITA No.1727/Del./2016 ITA No.1619/Del./2016 denied the existence of international transactions and has not

received any subsidy/grant in connection with international

transactions with its AE.

Eye Care (India) Pvt. Ltd. vs. Addl.CIT (2016) 381 ITR 227

(Del.) and Honda Siel Power Products Ltd. vs. DCIT (2016) 327 Taxman 304 held that it is for the Revenue to firstly discharge the

onus to prove the existence of international transactions between

the taxpayer and its AEs and thereafter the ALP of international

transactions only can be computed. In the instant case, there is not

an iota of material on the file apart from applying BLT and by

taking the view that the taxpayer has incurred huge and excessive

expenditure on AMP and sales to the tune of 15% of the total sales,

no cogent material is there to treat the incurring of AMP expenses

as international transactions.

expenses as per sub-clause (ii) to Rule 10B(1)(c) by the ld.

DRP/TPO/A0 is concernedly, Hon’ble Delhi High Court in para

178 of Sony Ericsson Mobile Communications India Pvt. Ltd.

(supra) held that, “the Revenue’s stand in some cases applying the

prime lending rate fixed by the Reserve Bank of India with a

further mark-up, is mistaken and unfounded, and as such is not

16 ITA No.1727/Del./2016 ITA No.1619/Del./2016 sustainable.” Ld. DRP however erred in directing the TPO to

determine the mark up on the ALP by taking the GP/AMP ratio as

laid down by Hon’ble Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra) because the first step is

to determine the existence of international transactions by the

Revenue and if the existence of international transactions qua AMP

expenditure is established only then ALP of the same is to be

determined.

erred in appreciating that “selling expenses” is not only to trade

discount/volume discount rather any expenses which have been

incurred for purpose of enhancing sales would fall under the

purview of selling expenses and cannot relied upon Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). We agree with

the contention raised by the ld. AR for the taxpayer because

Sony Ericsson Mobile Hon’ble Delhi High Court in

Communications India Pvt. Ltd. (supra) held that “direct

marketing and selling related expenses or discount concessions

would not form part of the advertising, marketing and promotion

expenses.”

arrangement or agreement between the taxpayer and its AE leading

17 ITA No.1727/Del./2016 ITA No.1619/Del./2016 to the conclusion that AMP expenses incurred by the taxpayer was

not for its own benefit or benefit of its AE.

position enunciated in the preceding paragraphs, but he contended

that since all the aforesaid decisions are lying challenged before the

Hon'ble Apex Court, the matter may be kept pending till the

decision by Hon'ble Apex Court. However, we are of the

considered view that since it is a stay granted matter and the

proceedings before the second appellate authority have not been

stayed by any higher forum, the same cannot be kept pending.

preceding paragraphs, we are of the considered opinion that the

ALP of an international transaction involving AMP expenses, the

adjustment made by the TPO/DRP/AO is not sustainable in the

eyes of law. At the same time, we cannot ignore the submission of

the learned DR that the matter is pending before Hon'ble Apex

Court and the decision of Hon'ble Apex Court would be binding

upon all the authorities. In view of the above, we set aside the

orders of authorities below and restore the matter to the file of the

Assessing Officer. We hold that as per the facts of the case and the

legal position as of now and discussed above in this order, the

adjustment made by the TPO/DRP/AO in respect of AMP expenses

18 ITA No.1727/Del./2016 ITA No.1619/Del./2016 is not sustainable. However, if the above decisions of Hon'ble

Jurisdictional High Court which is under consideration before the

Hon'ble Apex Court is modified or reversed by the Hon'ble Apex

Court, then the Assessing Officer would pass the order afresh

considering the decision of Hon'ble Apex Court. In those

circumstances, he will also allow opportunity of being heard to the

assessee.

considered view that following the law laid down by Hon’ble Delhi

High Court in Sony Ericsson Mobile Communications India Pvt.

Ltd. (supra), adjustment made by the TPO/DRP/AO on account of

ALP of AMP expenses is not sustainable in the eyes of law, hence

deleted. So, the appeal filed by the taxpayer is allowed and the

appeal filed by the Revenue is dismissed. Order pronounced in open court on this 22nd day of January, 2021.

Sd/- sd/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated the 22nd day of January, 2021 TS

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