Natural justice in capacity determination requires notice and hearing before rejecting a disputed machinery-change claim and fixing higher production.

Under Section 3A and the Annual Capacity Determination Rules, 1997, a capacity-determination order under Rule 4(2) that turns on disputed technical and mechanical facts cannot be made ex parte if it prejudices the assessee by fixing a higher notional production. The authority must give prior notice, an effective opportunity to explain the change in machinery and related parameters, and a reasoned order before rejecting the claimed alteration. The rejection of the assessee's request and the consequential duty demand were set aside for breach of natural justice, and the matter was remanded for fresh decision after hearing the assessee.

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Issues: Whether the Commissioner could reject the assessee's request to alter the capacity-related parameter under Rule 4(2) and determine a higher notional production without giving the assessee notice and an effective opportunity of hearing.

Analysis: The scheme under Section 3A of the Central Excise Act, 1944 and the Annual Capacity Determination Rules, 1997 proceeds on determination of notional production for levy of duty. Rule 4(2) permits a change in the installed machinery affecting the relevant parameters, but where the Commissioner proposes to record findings adverse to the assessee by treating the change as ineffective and by retaining a higher capacity figure, fairness requires notice, opportunity to explain the technical and mechanical aspects, and a reasoned decision. An ex parte determination on such a materially disputed issue violates the principles of natural justice.

Conclusion: The rejection of the assessee's claim and the consequential duty demand were set aside for denial of natural justice, and the matter was remanded for fresh decision after granting adequate opportunity to the assessee.

Ratio Decidendi: Where a capacity-determination order under Rule 4(2) turns on disputed technical facts and may prejudice the assessee by fixing a higher notional production, the authority must give prior notice, hear the assessee, and pass a reasoned order before rejecting the claimed change.

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