The department of commerce may de-recognise the 247-hectare engineering special economic zone at Hazira, promoted by Essar Hazira SEZ Ltd, on the ground that the company had units under construction in the zone when it applied for approval in 2005, in violation of SEZ rules.

At the same time, two Essar Steel executives were arrested by the excise authorities based in Gujarat for allegedly moving goods from the SEZ to the domestic tariff area.

Commerce ministry officials confirmed that the duty (around Rs 300 crore or Rs 3 billion on excise and customs) has since been paid, but that the executives were arrested for violating the Customs Act. They are likely to get bail tomorrow.

Under SEZ rules, a developer has to file an affidavit stating that the land area of the zone is completely vacant and without any kind of industrial activity when the application is filed. The idea is to prevent operational industrial units from migrating to SEZs, which would defeat the employment-generating purpose of the SEZ policy.

The Essar SEZ was notified on September 28, 2006, according to the commerce ministry. This happened nearly four months after it received formal approval from the inter-ministerial Board of Approval.

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"The department of revenue complained to us that the land area of the zone was not vacant and many units were already under construction when Essar filed the application. The development commissioner of Kandla SEZ has launched an inquiry and will file the report next week. We will de-recognise the zone if the allegations are found to be true," a commerce ministry official added.

Essar denial: Claiming that it had not violated any rule, Essar has said that its special economic zone at Hazira started to function as such only from March 20. This was the date when it filed the first bill of entry with the customs department.

The company says the issue is one of interpretation of SEZ rules, which have undergone a number of amendments since the SEZ Act was enacted in February 2006.

Essar Group Director Prashant Ruia said Essar Hazira did not treat itself as a SEZ from October 27 but instead functioned as a domestic tariff area unit.

"We have appraised the government of the facts, paid the duty and took the safe route of not treating ourselves as a SEZ from October. By not treating ourselves as a SEZ we did not avail of the number of benefits that are available under the policy. Just because we were cautious, we cannot be penalised."

"The land was vacant. It is a brand new facility and anyone can verify this fact. We have already invested Rs 1,000 crore (Rs 10 billion) for setting up a 4-million-tonne steel plant. We have all the necessary approvals and cannot be penalised," he said.

The Hazira SEZ got in-principle approval last October and the final approval came on January 11 this year. "We took two months to complete this formality and the customs department formally certified us a customs bonded area on March 20", he said.