The country?s second largest IT company, Infosys Technologies, could potentially face a tax liability of Rs 100 crore for alleged violations of special economic zones (SEZ) rules at its Chandigarh SEZ. The revenue department, in a series of letters to the commerce ministry, has said that tax and duty benefits given to Infosys? Chandigarh SEZ should be recovered along with penal action.

According to documents reviewed by FE, the revenue department in the finance ministry has observed that the company converted an existing IT campus ? which had ?economic and commercial activity going on? even before the SEZ status was accorded in June 2006 to illegally avail of tax and duty benefits provided under the SEZ Act to promote exports by passing off existing infrastructure as new. ?This is in violation of Rule 7 of SEZ rules which requires identified areas to be vacant,? it said.

Moreover, the IT firm also carried out a series of complex land buying and lease deals with the Chandigarh Administration in order to buttress its legality of the SEZ status.

??the SEZ status of the project may have to be withdrawn. Prime facie, the violation appears very serious. These would necessitate not only recovery of the duties and taxes, along with interest but also penal action,? the department has noted.

In reply to a detailed questionnaire sent by FE, the company said, ?We are very surprised at this statement. We have complied with the SEZ regulations, our site has been inspected by the authorities and full disclosure has been made to the Board of Approvals. The development commissioner and the Chandigarh administration have provided all the information to the Board of Approvals. This SEZ is formed by the Chandigarh administration as developer and we are there as a unit in the zone.?

Even the department of commerce has noted, ?Infosys establishment in Chandigarh started of as an IT campus project and later converted into an SEZ.? It also said that keeping the above facts in view, ?many of the infrastructure was established earlier which subsequently was supposed to be established by the developer.?

If the allegations are proved right, it could come as a major setback for the company, which has so far managed to maintain a very clean image, said technology sector analysts. However, some are also of the view that the continuous disconnect between the revenue and the commerce ministry is to blame. ?There are several issues the industry is facing with SEZ. However, Infosys Chandigarh SEZ case appears serious nonetheless,? said an analyst with a top four consultant.

The allegation is that Infosys not only had existing structures in place but also owned the land (around 30 acre), something which is against the SEZ rules and laws.

In April 2009, it effected a lease agreement with the Developer ? Chandigarh Administration?with a clause that the land will be converted into free-hold after 10 years.

Earlier last week, revenue secretary Sunil Mitra said that the department will find a solution on the issue soon by holding discussions with the commerce secretary Rahul Khullar.