What is wrong with this seeming contradiction with a paper about AND-compression of SAT?
The confusion arises from a misunderstanding of what being polynomial in the size of the largest instance means.  It does not mean that polynomial growth of the compressor's output is allowed as the number of instances ($t$) increases.  Rather it means the compressor's output is allowed to grow only as the maximum instance size grows, independent of $t$, and then only within a fixed polynomial of that value.

Your compressor concatenates the CNF instances, converts them to circuits, and then converts the circuits back to CNF.  Its output grows linearly with the number of instances ($t$) independent of the instance sizes and is therefore bound to exceed any polynomial function of the maximum instance size.  Because of this, indeed because it does not do any compression at all, your compressor does not cause any hierarchy collapse.

There also seems to be a misunderstanding as to what the AND-compressor function is supposed to do.  It does not have to output an instance that preserves all satisfying assignments for all the input instances, nor does there need to be a parsimonious counting reduction from the input instances to the output instance.  A conforming implementation could at the extreme output an empty instance if all the input instances are satisfiable and a single empty clause otherwise.

A more plausible AND-compressor might adapt standard data compression techniques such as the use of a dictionary.  A table of unsatisfiable subformulas could be precomputed and used to search against the input SAT instances.  A match would imply a forbidden variable assignment, which when instantiated as a learned clause might subsume (eliminate) several other clauses.

Another technique involves taking advantage the different sizes of the input instances.  If the input instances are of different sizes, the larger instances could be searched for subformulas equivalent to one of the smaller instances.  Such a match implies the existence of a variable assignment that could produce the subformula, and therefore the larger instance is satisfiable if the smaller instance is satisfiable.  If the smaller instance is unsatisfiable, the larger instance might still be satisfiable but it doesn't matter because compressor output should still produce an unsatisfiable formula.  So the output instance is effectively decoupled from the satisfiability of the larger instance and thus the larger instance no longer has to be represented in the output at all, eliminating a large number of clauses.

There are many other techniques.  The theorem in the paper suggests that efficiently achieving high levels of compression is unlikely given the implied partial collapse of the polynomial hierarchy.