Explosives were found at the Kalyan-Dombivli Municipal Corporation (KDMC) water-treatment plant, at the Barave village, on Monday.
The presence of the explosives - 75 gelatin sticks and 14 detonators - came to light after repeated complaints from residents of the village.
Madhu Patil, a resident said: "Every day, we would hear explosions from the site. The walls of our house developed cracks, with the impact. Two days ago, we informed the local corporator and Member of the Legislative Assembly Prakash Bhoir."
"On Monday, some villagers and Bhoir visited the spot, and saw that there were explosives there," he added.
Holding the contractor responsible, Ramnath Sonawane, commissioner, KDMC said: "We are increasing the storage capacity of the Barave plant and had given a contract for the same to Kirloskar and Brothers. The contractor is using explosives without permission and hence is at fault. The Corporation will take appropriate action against the contractor.
Police inspector Sunil Patil said that the explosives had been seized and four people have been taken into custody. "We are waiting for the owner of the firm Kirloskar and Brothers," he said.
Police will register and offence against the contractor and those working on the site.