The appeal before the Federal Court in Ketua Pengarah Hasil Dalam Negeri v Tenaga Nasional Berhad [2025] CLJU 1557 revolved around the Director General of Inland Revenue’s (the “Director General”) rejection of a claim made by Tenaga Nasional Berhad (“TNB”) for Reinvestment Allowance under Schedule 7A of the Income Tax Act 1967 (“ITA”) – which allows eligible Malaysian companies that have incurred capital expenditure on a factory, plant or machinery for certain projects in respect of the manufacturing of a product to claim a reinvestment allowance in respect of such expenditure – for the year of assessment 2018.
 
Background
 
Under scrutiny in the Federal Court was the reason cited by the Director General for the said rejection, namely that Schedule 7A ITA was inapplicable as TNB’s principal activity was in generating electricity and not in manufacturing. Rather, to the Director General, TNB ought to have instead raised a claim for investment allowance under Schedule 7B ITA, which allows eligible Malaysian companies that have incurred capital expenditure for the purpose of an ‘approved service project’, including projects relating to ‘utilities’, to claim an investment allowance in respect of such expenditure.
 
Aggrieved by the rejection of its Schedule 7A claim, TNB filed, among others, an application for judicial review in the High Court seeking to quash the Director General’s decision. With reference to supportive case law, the High Court was persuaded that TNB’s principal activity of generating electricity was a manufacturing activity and therefore allowed the judicial review application, which was subsequently affirmed by the Court of Appeal.
 
The Director General obtained leave to appeal to the Federal Court on the following sole question of law:
 
“Whether the Court of Appeal is correct in its determination of the Respondent’s activities is that of manufacturing under Schedule 7A of the ITA 1967 based on the cases of Majlis Perbandaran Seberang Perai v Tenaga Nasional Bhd [2005] 1 MLJ 1 and Ketua Pengarah Hasil Dalam Negeri v Success Electronics & Transformer Manufacturer Sdn Bhd [2012] MSTC 30-039 without regard to the real intention of the Parliament in enacting Schedule 7B of the ITA 1967 which applies to the utility sector?”
 
The Federal Court’s Decision
 
To the Federal Court, the sole issue for determination in the Director General’s appeal was whether TNB “is in the business of manufacturing when it generates, transmits and distributes electricity for sale to its customers” and therefore whether Schedule 7A or 7B ITA is applicable. In determining this issue, the Federal Court first considered the authorities cited in the leave question – two key authorities cited by the High Court and Court of Appeal in support of the finding that TNB was engaged in manufacturing activities.
 
First is the decision of the Federal Court in Majlis Perbandaran Seberang Perai v Tenaga Nasional Bhd [2005] 1 MLJ 1 (“MPSP”), where electricity generated by TNB was found to be an ‘article’ produced by machinery and therefore it was held that enhanced value to TNB’s holdings due to such machinery should not be taken into consideration when determining the value of TNB’s holdings for purposes of imposing rates under the Local Government Act 1976. To the High Court and Court of Appeal, the decision in MPSP was persuasive authority that TNB was engaged in the business of manufacturing electricity. However, the Federal Court, acknowledged that the decision in MPSP was made in the context of, among others, the Local Government Act 1976, and therefore cautioned that it must be looked at within the proper context and could not be used generally.
 
Next is the High Court’s decision in Ketua Pengarah Hasil Dalam Negeri v Success Electronics & Transformer Manufacturer Sdn Bhd [2012] MSTC 30-039 (“Success Electronics”), where dictionary definitions of the word ‘factory’ were considered for purposes of the taxpayer’s entitlement to reinvestment allowance due to an uncertainty as to whether certain paraphernalia and building space of the taxpayer were considered a ‘factory’. With reference to the decision in Success Electronics, the High Court and Court of Appeal below also similarly considered the dictionary definition of ‘manufacturing’ in coming to their decisions. However, the Federal Court acknowledged that unlike the word ‘factory’, ‘manufacturing’ is specifically defined in Schedule 7A ITA, therefore casting doubt on the need to refer elsewhere to determine its meaning.
 
A number of decisions from other Commonwealth nations where utility companies were considered to be engaged in manufacturing activities for tax purposes were put forward by TNB to support its position. However, the Federal Court acknowledged that none of the relevant Commonwealth nations had similar statutory provisions such as those in Schedules 7A and 7B ITA.
 
It therefore became necessary for the Federal Court to consider what Parliament’s intention would have been in enacting the two Schedules. In doing so, the Federal Court referred to the explanatory statement when the Schedules were first introduced to Parliament (see paragraph [18] of the Federal Court’s decision) and stated that Schedule 7A ITA “was to incentivize manufacturing companies to reinvest in their existing businesses in our country” by providing reinvestment allowance for capital expenditure incurred on plants, machinery or factories to expand, modernize, automate or diversify its existing business in manufacturing or production. On the other hand, the Federal Court stated that the aim of Schedule 7B ITA was “to encourage investments in infrastructure and services that are essential for public welfare and economic development, which…is helpful to promote the growth of the service”. To the Federal Court, it was “patently obvious” that Schedule 7A ITA catered for ‘manufacturing’ whereas Schedule 7B catered for ‘utilities’. Further, the Federal Court noted that TNB had not provided justification as to how the relief being sought was for expenditure that went towards ‘expanding, modernising or automating its existing business’.
 
The Federal Court therefore held that TNB, being an established public utility vehicle, ought to have raised its claim within the confines of Schedule 7B ITA, even if it could be said that TNB was in the business of manufacturing electricity. Although the Federal Court did acknowledge that TNB could not be blamed for submitting its claim under Schedule 7A ITA, this did not mean that the Director General had no option but to allow the claim. Accordingly, the Director General’s appeal was allowed, with no order as to costs due to the case being of public interest.
 
Case Note by Arif Umar Faruq Bin Faiz (Senior Associate) of the Dispute Resolution Practice of Skrine.
 
This Case Note was first published in Highlights from the Appellate Courts (No 12/2025) and has been reproduced with permission of the Malaysian Bar’s Publications Committee. Arif is a member of the Publications Committee.