UK's Cairn Energy Plc has offered to forego USD 500 million and invest that amount in any oil and gas or renewable energy project identified by the Indian government if New Delhi agrees to honour an international arbitration award and returns the value of loss it incurred because of being taxed retrospectively, sources said.

The Scottish firm invested in the oil and gas sector in India in 1994 and a decade later it made a huge oil discovery in Rajasthan. In 2006-07, it listed its Indian assets on the BSE. Five years after that the government passed retroactive tax law and billed Cairn Rs 10,247 crore plus interest and penalty for the reorganisation tied to the flotation.

The state then expropriated and liquidated Cairn's remaining shares in the Indian entity, seized dividends and withheld tax refunds to recover a part of the demand.

Cairn challenged the move before an arbitration tribunal in The Hague, which in December awarded it USD 1.2 billion (over Rs 8,800 crore) plus costs and interest, which totals USD 1.725 million (Rs 12,600 crore) as of December 2020.

The company has in talks with finance ministry officials offered to forego the interest and cost, totalling over USD 500 million and invest that sum in any oil and gas or renewable energy project identified by the Indian government if the principle of USD 1.2 billion due to it is paid, three sources with knowledge of the matter said.

The Indian government, which appointed one of the three arbitrators on The Hague panel and fully participated in the arbitration proceedings since 2015, wanted Cairn to settle the issue through its now-closed tax dispute resolution scheme, Vivad se Vishwas.

Vivad se Vishwas scheme, which closed on March 31, provided for the dropping of tax case if 50 percent of the demand was paid, which the company rejected, they said.

Even if it were to have agreed to the scheme, the Indian government had to refund about Rs 2,500 crore to the British firm, they said adding the value of shares seized and sold, dividend confiscated and tax refund withheld totalled to over Rs 7,600 crore which was more than 50 percent of the Rs 10,247 crore principal tax demand raised.

"The company has a tribunal ruling which says India breached its obligations to Cairn under the UK-India Bilateral Investment Treaty and that compensation in form of return of the value of shares seized and sold, tax refund withheld and dividend confiscated was due. Instead, you are asking it to pay half of the tax amount raised levying short-term capital gains tax is something that the company's marquee shareholders will never agree to," one of them said.

While Cairn declined to comment on the story, finance ministry officials could not be immediately reached for comments.

Cairn executives have since held three face-to-face meetings and at least one video call with top finance ministry officials to get them to honour the award.

Both sides are eager to resolve the issue quickly without resorting to any harsh measures, sources said.

The Indian government has appealed against the tribunal ruling on grounds that tax levied by a sovereign power should not be subject to private arbitration.

In the meantime, therefore, Cairn, which is of the opinion that the unanimous ruling of the tribunal was enforceable against Indian-owned assets in more than 160 countries that have signed and ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, has hired asset-tracing firms to investigate the overseas assets that could be seized to recover the amount due.

Cairn has already taken steps to have the arbitration award recognised in nine major jurisdictions such as the US, UK, France, the Netherlands, Singapore and Canada's Quebec province, where Indian sovereign assets have been identified.

It hasn't said what it might go after but assets could include Air India's planes, vessels belonging to the Shipping Corporation of India and property owned by state banks.