Compounded levy capacity changes cannot operate retrospectively, but unauthorized machinery alteration still attracts duty, interest and penalty.

Under the compounded levy scheme, revised mill capacity could not be applied retrospectively before the competent authority's capacity determination order, so differential excise duty for the pre-order period was unsustainable; the duty from December 1997 onwards was upheld. Unauthorized alteration of machinery affecting production capacity, without prior approval, justified penalty and interest because the explanation of repair was unreliable on the record. The penalty was moderated in light of the revised duty amount and reduced to Rs. 1 lakh, while the balance of the demand and interest remained sustained.

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Issues: (i) whether differential central excise duty based on revised mill parameters could be demanded for the period prior to the Commissioner's capacity determination order in November 1997; (ii) whether penalty and interest were leviable on the changed capacity and unauthorized alteration of machinery.

Issue (i): Whether differential central excise duty based on revised mill parameters could be demanded for the period prior to the Commissioner's capacity determination order in November 1997.

Analysis: The evidence indicated enhancement of capacity through upgradation of the mill parameters, but the revised parameters could not be treated as operative from the very beginning. The capacity determination order itself recorded verification of the declared parameters, and no material justified a demand for the earlier period. The duty liability could arise only after the original determination order, when the higher capacity became relevant for assessment.

Conclusion: The demand for the period prior to the Commissioner's order was unsustainable, while the differential duty from December 1997 onwards was upheld.

Issue (ii): Whether penalty and interest were leviable on the changed capacity and unauthorized alteration of machinery.

Analysis: Under the compounded levy scheme, any change affecting annual production capacity required prior approval of the Central Excise authorities. The assessee had not obtained such approval and the explanation for alleged repair was found unreliable because of inconsistencies in the contemporaneous record. The default therefore justified penal consequences, and interest was also payable on the confirmed duty demand. At the same time, the quantum of penalty was moderated in view of the revised duty amount.

Conclusion: Penalty and interest were justified, but the penalty was reduced to Rs. 1 lakh.

Final Conclusion: The appeal succeeded only to the limited extent of excluding the pre-order duty demand and reducing the penalty, while the balance of the demand, including interest, was sustained.

Ratio Decidendi: In a compounded levy scheme, a revised production capacity cannot be applied retrospectively before the competent authority's determination, and unauthorized alteration of machinery affecting capacity attracts duty, interest, and penalty.

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