Annual capacity under compounded levy cannot be redetermined for temporary machinery breakdown; admitted higher production governs duty liability.

Under the compounded levy scheme for hot re-rolling mills, temporary non-functioning of one machine part at inspection did not justify re-determination of annual capacity because there was no change in the installed machinery or reliable material showing altered installed capacity. However, where the formula-based capacity under the Capacity Determination Rules was lower than the assessee's admitted actual production for the preceding year, the annual capacity had to be taken at the higher admitted figure. Duty liability was therefore fixed on the annual capacity so determined.

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Issues: Whether the annual capacity of a hot re-rolling mill could be re-determined on the basis that one pinion stand was temporarily not functional at the time of inspection, and whether the annual capacity and duty liability had to be fixed with reference to the formula under the Capacity Determination Rules or the admitted actual production for the preceding financial year.

Analysis: The compounded levy scheme under Section 3A of the Central Excise Act, 1944 and the Hot Re-rolling Steel Mills Annual Capacity Determination Rules, 1997 fixed duty with reference to annual capacity of production. The Court noted that mere temporary non-functioning of a part of the machinery, without any change in the installed machinery or reliable material showing a different installed capacity, did not justify re-determination of capacity. At the same time, the assessee had admitted that actual production during 1996-97 was 15,796.150 metric tonnes. Under Rule 5 of the Capacity Determination Rules, where the capacity worked out by the formula is less than actual production for 1996-97, the annual capacity is deemed to be equal to such actual production.

Conclusion: Re-determination of capacity on the basis of temporary dislocation was not justified, but the annual capacity was correctly fixed at 15,796.150 metric tonnes on the basis of admitted actual production, and duty was recoverable on that basis.

Final Conclusion: The challenge to enhancement of capacity on the basis of the inspection failed, but the assessee's liability was upheld only to the extent of annual capacity determined by the admitted actual production under the Rules.

Ratio Decidendi: Under the compounded levy scheme, a temporary breakdown or non-functioning of machinery does not by itself warrant re-determination of annual capacity, and where the formula-based capacity is lower than the admitted production for the preceding financial year, the annual capacity must be taken at the higher admitted figure prescribed by the rules.

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