Tor supports two classes of cover traffic: connection-level padding, and circuit-level padding.
Connection-level padding uses the CELL_PADDING cell command for cover traffic, where as circuit-level padding uses the RELAY_COMMAND_DROP relay command. CELL_PADDING is single-hop only and can be differentiated from normal traffic by Tor relays ("internal" observers), but not by entities monitoring Tor OR connections ("external" observers).
RELAY_COMMAND_DROP is multi-hop, and is not visible to intermediate Tor relays, because the relay command field is covered by circuit layer encryption. Moreover, Tor's 'recognized' field allows RELAY_COMMAND_DROP padding to be sent to any intermediate node in a circuit (as per Section 6.1 of tor-spec.txt).
Tor uses both connection level and circuit level padding. Connection level padding is described in section 2. Circuit level padding is described in section 3.
The circuit-level padding system is completely orthogonal to the connection-level padding. The connection-level padding system regards circuit-level padding as normal data traffic, and hence the connection-level padding system will not add any additional overhead while the circuit-level padding system is actively padding.