High Court Clarifies The Concept Of Processing For Reinvestment Allowance

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Reinvestment allowance (RA) is a type of tax incentive available to taxpayers undertaking a qualifying activity described in paragraph 8 of Schedule 7A of the Income Tax Act 1967 (ITA) at the rate of 60% of the capital expenditure on factory or plant and machinery.

Recently, the High Court in Serba Wangi (PG) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2025] AMEJ 0313 allowed the taxpayer’s appeal in claiming RA on the capital expenditure incurred for the construction of a new factory and purchase of grain sorters.

Facts

Prior to 2006, the taxpayer operated as a rice wholesaler who carried out its business in a rented factory. In 2006, the taxpayer constructed its own factory and subsequently claimed RA on the capital expenditure incurred on the costs of building the factory as well as for the costs of purchasing new grain sorters as plant and machinery.

Following a tax audit in 2012, the Revenue disallowed the taxpayer’s RA on the basis that the grain sorters merely sort out foreign objects in the rice which does not qualify as rice processing.

Being aggrieved by the disallowance of the RA, the taxpayer filed an appeal to the Special Commissioners of Income Tax (SCIT).

The SCIT’s Decision

The SCIT did not allow the taxpayer’s appeal and held that the taxpayer did not satisfy the requirements to claim RA for the following reasons:

1. The taxpayer did not undertake a qualifying project due to the absence of any “processing” activity involving the product i.e. rice. The machinery was merely used to sort out the good rice grains from the blackish rice grains. Thus, there was no “processing” involved as there was no change in the structure of the rice grains.

   
   

2. The taxpayer did not diversify by increasing or changing the range of products.

   
   

3. As the taxpayer held a wholesale license, it was not allowed to process rice as the taxpayer was just a rice wholesaler.

The High Court’s Decision

The High Court allowed the taxpayer’s appeal and set aside the SCIT’s decision. The starting premise was for Schedule 7A to be interpreted purposively and not restrictively based on the principle enunciated by the Court of Appeal in Ketua Pengarah Hasil Dalam Negeri v Tenaga Nasional Berhad [2024] 8 CLJ 301. It must be appreciated that RA was implemented for the purpose of encouraging companies to expand, modernise, automate or diversify their business.

Here, the taxpayer expanded its business by building a factory, which was larger than its previously rented factory. Second, the taxpayer also automated its business by purchasing various sorter machines to process raw rice into three products such as processed rice for household consumption, vermicelli and rice bran. As the word processing was not provided under Schedule 7A, the High Court took cognisance of the definition in paragraph 6.2.2 of the Public Ruling No.6/2012 which reads:

1. Processing is the subjection of goods to a process which means, goods or materials are subjected to a process which falls short of the manufacturing of a new article and involves the treatment of the goods in some way, other than natural growth.

   
   

2. Processing refers to a technique of preparation, handling or other activity designed to effect a physical or chemical change in an article or substance.

   
   

3. An activity may be termed as processing where a product has gone through a series of actions that are systematic, has a higher value than before (has been made more marketable and would attract a higher price for the same amount) and is accepted by the market.

Applying the above definition of “processing”, the taxpayer in the present matter carried out “processing” activities and was thus, entitled to the RA claim for the following reasons:

“Third—the evidence discloses that the Appellant’s business, and by extension the machinery that the Appellant purchased (for which it is claiming an RA), is to turn raw rice into three products:

(1)  processed rice (for household consumption);

(2)  broken rice (supplied to factories that make noodles, like vermicelli); and

(3)  rice bran (sold as animal feed).

The Appellant’s machinery systematically subjects the raw rice to a series of actions that physically change the raw rice into these three products, which, when taken together, have a higher value than the raw rice in its original form. To my mind, it is clear and undoubtable that the Appellant carried out the activity of “processing”.”

Further, the mere fact that the taxpayer was holding a wholesale license does not prohibit the taxpayer from operating a rice processing business.

Commentary

The decision in Serba Wangi demonstrates that the High Court’s broad interpretation of “processing” takes into account a practical understanding of the commercial realities in the taxpayer’s business. This ruling recognises that processing activities need not involve structural transformation of the product, so long as they enhance its market value.

This position was similar to the decision in Ketua Pengarah Hasil Dalam Negeri v Classic Japan (M) Sdn Bhd [2022] 3 MLJ 894, where the Court of Appeal similarly adopted a broad view of “processing” by holding that the cutting, packaging and inspection of flowers amounted to processing activity.

In light of this decision, taxpayers engaged in value-adding activities may have a stronger basis to argue that such activities constitute “processing” under Schedule 7A. It is advisable for taxpayers to maintain detailed documentation to substantiate the capital expenditure incurred in the course of the manufacturing activity.

23 May 2025