Annual capacity levy cannot override protested actual-production payments; interest and penalty also fail without statutory authority.

Under the Section 3A compound levy scheme, duty could not be confirmed on annual capacity of production where the assessee had consistently disputed the capacity fixation, paid duty under protest, and maintained payment on actual production basis; on those facts, the Revenue could not show a prior acceptance of capacity-based assessment, so the demand was unsustainable. Interest and penalty also could not be sustained because the special levy framework did not itself authorise such liability beyond clear statutory sanction, and the failure of the principal demand removed the basis for ancillary levies. The impugned order was set aside in full, with consequential relief as permitted in law.

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Issues: (i) Whether duty demands raised on the basis of annual capacity of production could survive when the assessee had consistently disputed the capacity fixation and paid duty under protest on actual production basis. (ii) Whether interest and penalty could be sustained under the compound levy regime in the facts of the case.

Issue (i): Whether duty demands raised on the basis of annual capacity of production could survive when the assessee had consistently disputed the capacity fixation and paid duty under protest on actual production basis.

Analysis: The dispute was examined against the statutory scheme under Section 3A of the Central Excise Act, 1944 and the binding principle that the assessee has two alternative modes of discharge of duty liability, namely on annual capacity basis or on actual production basis. The record showed that from the inception the assessee had objected to the capacity fixation, had repeatedly stated that duty was being paid under protest, and had not accepted the capacity-based determination. In such circumstances, there was no material to support the Revenue's stand that the assessee had initially opted for capacity-based assessment and later sought to switch over. The settled rule that an assessee cannot combine the two procedures within the same financial year did not assist the Revenue on these facts.

Conclusion: The demand confirmed solely on the basis of annual capacity was unsustainable and was set aside in favour of the assessee.

Issue (ii): Whether interest and penalty could be sustained under the compound levy regime in the facts of the case.

Analysis: The question of interest and penalty was considered in the light of the Supreme Court's ruling that the special scheme under Section 3A does not itself authorise levy of interest, and that the relevant rules cannot create such liability or impose a mandatory penalty beyond statutory authority. Once the substantive demand itself failed, the ancillary levy of interest and penalty could not survive. The provisions governing the compound levy regime were therefore applied as not authorising the impugned interest and penalty in the manner done by the adjudicating authority.

Conclusion: The interest and penalty were not sustainable and were set aside in favour of the assessee.

Final Conclusion: The impugned order was set aside in full and the appeal succeeded with consequential relief as permissible in law.

Ratio Decidendi: Where an assessee has consistently disputed capacity fixation and has not accepted the annual-capacity regime, duty cannot be confirmed on that basis alone; and interest or mandatory penalty cannot be imposed under the special levy scheme unless clearly authorised by statute.

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