Does breaking up ships count as production for the section 80HH and 80-I deduction, and must I deduct tax at source on usance interest paid abroad on the vessel I bought?
Yes to the deduction, and no tax was deductible. The Supreme Court held that ship breaking gives rise to the production of a distinct and different article, so the deduction under sections 80HH and 80-I was rightly allowed. Production is wider than manufacture, the two words are used disjunctively, and nothing in the ordinary meaning of produce requires the article to be new. On the second question, Explanation 2 to section 10(15)(iv)(c), inserted on 18 September 2003 with effect from 1 April 1983, exempts usance interest payable outside India by a ship breaking undertaking on the purchase of a ship. Since the sum was not assessable in India, no obligation to deduct under section 195(1) arose.
Decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ.) on 2008-10-01, reported as AIRONLINE 2008 SC 356. It bears on section 80HH, section 80-I, section 195(1), section 10(15)(iv)(c) of the Income Tax Act 1961, in Deductions & Disallowances and TDS Defaults matters.
Two propositions of general use come out of this. The first is the settled distinction between manufacture and production for the incentive deductions: because Parliament used both words, production cannot take its colour from manufacture, and the requirement of a new article which the Revenue reads into N.C. Budharaja was rejected here, following Sesa Goa. Breaking down an existing thing into distinct articles is production. The second is the simple but often forgotten rule on withholding: tax at source arises only where the sum is assessable in India, so once an exemption applies there is nothing to deduct. The case is also a reminder that a retrospective amendment can change the answer after the High Court has decided, and that the Supreme Court will decide on the law as amended.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
The appellants carried on ship breaking. Two questions arose across the batch. The first was whether they were entitled to deduction under sections 80HH and 80-I, which require the industrial undertaking to be engaged in manufacturing or producing articles. The Gujarat High Court, by the judgment under appeal of 20 March 2003, had held that the articles emerging from breaking a ship continue to be parts of the ship, are not new goods, and so involve neither manufacture nor production; it denied the deduction, reversing the Tribunal. The second question was whether the assessees were bound to deduct tax at source under section 195(1) on usance interest paid on the purchase of a vessel from outside India. The Department said tax was deductible; the assessees said the interest partook of the character of the purchase price. After the High Court judgment, and before the Supreme Court heard the appeals, the Act was amended on 18 September 2003 with effect from 1 April 1983 to insert Explanation 2 to section 10(15)(iv)(c), declaring that usance interest payable outside India by a ship breaking undertaking on the purchase of a ship from outside India is to be deemed interest payable on a debt incurred in a foreign country in respect of a purchase outside India.
The assessees' appeals were allowed and the Department's appeal dismissed, with no order as to costs. On the first question the Court disagreed with the Gujarat High Court and held that the Tribunal was right to allow the deduction under sections 80HH and 80-I, ship breaking giving rise to the production of a distinct and different article. On the second question, it did not decide whether usance interest partakes of the character of the purchase price. It held instead that on the retrospectively inserted Explanation 2 to section 10(15)(iv)(c) such usance interest is exempt from income tax, and that since tax was not assessable in India there was no question of deduction at source; the assessees were therefore not bound to deduct under section 195(1).
On production, the Court started from N.C. Budharaja, where it had been held that production has a wider connotation than manufacture and, used alongside it, takes in bringing into existence goods by a process which may or may not amount to manufacture, including by-products, intermediate products and residual products. The Department fastened on the words new goods used there. The Court held that what was meant was that a distinct article emerges. Since Parliament used manufacture or production, the word production cannot derive its colour from manufacture; and the dictionary meaning of produce - something brought forth or yielded, naturally or as a result of effort and work - contains no requirement of newness. It relied on the Bombay High Court in Ship Scrap Traders, which had analysed the ship breaking process and the articles it yields and held on Budharaja that production results, and noted that Ship Scrap Traders stood affirmed by the three-Judge Bench in CIT v. Sesa Goa Ltd, where the identical argument that mined ore was not a new product had been specifically rejected. On withholding, the Court did not need to reach the character of usance interest at all. The retrospective Explanation made the interest exempt, and since the obligation under section 195(1) arises only where the sum is assessable in India, no deduction was required.
The assessee was not bound to deduct tax at source once Explanation-2 to Section 10(15)(iv)(c) stood inserted as TDS arises only if the tax is assessable in India.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppYes to the deduction, and no tax was deductible. The Supreme Court held that ship breaking gives rise to the production of a distinct and different article, so the deduction under sections 80HH and 80-I was rightly allowed. Production is wider than manufacture, the two words are used disjunctively, and nothing in the ordinary meaning of produce requires the article to be new. On the second question, Explanation 2 to section 10(15)(iv)(c), inserted on 18 September 2003 with effect from 1 April 1983, exempts usance interest payable outside India by a ship breaking undertaking on the purchase of a ship. Since the sum was not assessable in India, no obligation to deduct under section 195(1) arose. This was decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ.) and bears on section 80HH, section 80-I, section 195(1), section 10(15)(iv)(c) of the Income Tax Act 1961. It is reported as AIRONLINE 2008 SC 356. Two propositions of general use come out of this. The first is the settled distinction between manufacture and production for the incentive deductions: because Parliament used both words, production cannot take its colour from manufacture, and the requirement of a new article which the Revenue reads into N.C. Budharaja was rejected here, following Sesa Goa. Breaking down an existing thing into distinct articles is production. The second is the simple but often forgotten rule on withholding: tax at source arises only where the sum is assessable in India, so once an exemption applies there is nothing to deduct. The case is also a reminder that a retrospective amendment can change the answer after the High Court has decided, and that the Supreme Court will decide on the law as amended. If it applies to you, the first step is this: Where the deduction turns on manufacture or production, plead production separately and describe the process and the distinct articles that emerge; do not concede that a new article is required.
The appellants carried on ship breaking. Two questions arose across the batch. The first was whether they were entitled to deduction under sections 80HH and 80-I, which require the industrial undertaking to be engaged in manufacturing or producing articles. The Gujarat High Court, by the judgment under appeal of 20 March 2003, had held that the articles emerging from breaking a ship continue to be parts of the ship, are not new goods, and so involve neither manufacture nor production; it denied the deduction, reversing the Tribunal. The second question was whether the assessees were bound to deduct tax at source under section 195(1) on usance interest paid on the purchase of a vessel from outside India. The Department said tax was deductible; the assessees said the interest partook of the character of the purchase price. After the High Court judgment, and before the Supreme Court heard the appeals, the Act was amended on 18 September 2003 with effect from 1 April 1983 to insert Explanation 2 to section 10(15)(iv)(c), declaring that usance interest payable outside India by a ship breaking undertaking on the purchase of a ship from outside India is to be deemed interest payable on a debt incurred in a foreign country in respect of a purchase outside India. The matter was decided on 2008-10-01 by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ.). On those facts the Supreme Court held as follows. The assessees' appeals were allowed and the Department's appeal dismissed, with no order as to costs. On the first question the Court disagreed with the Gujarat High Court and held that the Tribunal was right to allow the deduction under sections 80HH and 80-I, ship breaking giving rise to the production of a distinct and different article. On the second question, it did not decide whether usance interest partakes of the character of the purchase price. It held instead that on the retrospectively inserted Explanation 2 to section 10(15)(iv)(c) such usance interest is exempt from income tax, and that since tax was not assessable in India there was no question of deduction at source; the assessees were therefore not bound to deduct under section 195(1).
On production, the Court started from N.C. Budharaja, where it had been held that production has a wider connotation than manufacture and, used alongside it, takes in bringing into existence goods by a process which may or may not amount to manufacture, including by-products, intermediate products and residual products. The Department fastened on the words new goods used there. The Court held that what was meant was that a distinct article emerges. Since Parliament used manufacture or production, the word production cannot derive its colour from manufacture; and the dictionary meaning of produce - something brought forth or yielded, naturally or as a result of effort and work - contains no requirement of newness. It relied on the Bombay High Court in Ship Scrap Traders, which had analysed the ship breaking process and the articles it yields and held on Budharaja that production results, and noted that Ship Scrap Traders stood affirmed by the three-Judge Bench in CIT v. Sesa Goa Ltd, where the identical argument that mined ore was not a new product had been specifically rejected. On withholding, the Court did not need to reach the character of usance interest at all. The retrospective Explanation made the interest exempt, and since the obligation under section 195(1) arises only where the sum is assessable in India, no deduction was required. In the words reproduced by the source cited on this page: "The assessee was not bound to deduct tax at source once Explanation-2 to Section 10(15)(iv)(c) stood inserted as TDS arises only if the tax is assessable in India."
It was decided by the Supreme Court on 2008-10-01 and is reported as AIRONLINE 2008 SC 356. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 80HH, section 80-I, section 195(1), section 10(15)(iv)(c), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The assessees' appeals were allowed and the Department's appeal dismissed, with no order as to costs. On the first question the Court disagreed with the Gujarat High Court and held that the Tribunal was right to allow the deduction under sections 80HH and 80-I, ship breaking giving rise to the production of a distinct and different article. On the second question, it did not decide whether usance interest partakes of the character of the purchase price. It held instead that on the retrospectively inserted Explanation 2 to section 10(15)(iv)(c) such usance interest is exempt from income tax, and that since tax was not assessable in India there was no question of deduction at source; the assessees were therefore not bound to deduct under section 195(1). It arises in Deductions & Disallowances and TDS Defaults matters, on section 80HH, section 80-I, section 195(1), section 10(15)(iv)(c) of the Income Tax Act 1961, and was decided by Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy, JJ.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Set out the steps of the activity in evidence, as the Bombay High Court did in Ship Scrap Traders - the analysis of the process is what carries the point. Before conceding a withholding default, check whether the sum is chargeable in the recipient's hands at all; if it is exempt, section 195(1) is not attracted. Check for retrospective amendments covering the year in question, even where the appellate order predates them.
Still good law. A citator search on the judgment returns 103 later decisions citing it. The Gujarat High Court applied it twice: in Assistant Commissioner v P.R. Ship Breaking (1 July 2011), answering the deduction question in favour of the assessee on the strength of it, and in CIT v Mitesh Impex (2 April 2014), which treats it as the Supreme Court's decision that ship breaking amounts to manufacture. The proposition that a payer is bound to deduct tax at source only if the sum is assessable in India is applied by the Bangalore Bench in Mukund Ltd (6 December 2012) and Kalyani Steels Ltd (6 December 2012) and by the Jaipur Bench in Modern Threads (India) Limited (15 February 2021). Nothing overruling or doubting it was found. The second answer still depends entirely on Explanation 2 to section 10(15)(iv)(c) as inserted in 2003 with retrospective effect, so the position for any given year turns on the statute as it then stood. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Court expressly did not decide whether usance interest partakes of the character of the purchase price, which was how the question was framed; it disposed of the point on the retrospective exemption instead. The batch line lists sections 40(a)(i) and 2(28A); neither is mentioned in the order, and sections 80HH and 80-I, which are the subject of the first question, are not in the batch line. The order does not set out the amounts involved or the facts of the individual appeals in the batch, and the Gujarat High Court judgment under appeal was not read. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The assessees' appeals were allowed and the Department's appeal dismissed, with no order as to costs. On the first question the Court disagreed with the Gujarat High Court and held that the Tribunal was right to allow the deduction under sections 80HH and 80-I, ship breaking giving rise to the production of a distinct and different article. On the second question, it did not decide whether usance interest partakes of the character of the purchase price. It held instead that on the retrospectively inserted Explanation 2 to section 10(15)(iv)(c) such usance interest is exempt from income tax, and that since tax was not assessable in India there was no question of deduction at source; the assessees were therefore not bound to deduct under section 195(1).
TaxSphere, “Vijay Ship Breaking Corpn v CIT”, https://taxnotice.vittsphere.com/caselaw/case/vijay-ship-breaking-corporation-v-cit/ (validity last checked 2026-08-29)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
Same point, in Delhi: if the recorded grounds fail, can the officer still tax an unrelated item?
One of my units qualifies for the priority industry deduction and made a profit, while another unit made a loss. Must I set the loss off before claiming?
My non-resident client filed a NIL return after a s.148 notice, the Assessing Officer found a permanent establishment and charged s.234B interest for years before 2012. Does the fact that he denied taxability defeat the s.209(1)(d) argument?
In March 2026 I remitted a fee to a company outside India without deducting anything, because I did not think any part of it was taxable here. The Assessing Officer now says section 195 obliged me to deduct on the whole remittance, or at least to apply to him before paying. Does section 195 say that — and since the new Act has come in, which Act governs my payment at all?
