A New York court has paused Cairn Energy's pursuit of US assets of Air India for the recovery of USD 1.2 billion arbitral award, so as to allow the British firm to reach a settlement with the Indian government on the long drawn dispute.

The New York district court delayed the tax suit to November 18, according to court documents reviewed by PTI.

This follows Cairn Energy and Air India jointly asking the court to stay further proceedings in view of the government enacting a fresh law to scrap retrospective taxation in the country.

The new law will result in withdrawal of the Rs 10,247 crore tax demand that the government had sought from Cairn.

Sources with direct knowledge of the matter said the finance ministry is framing rules that will lead to withdrawal of the retrospective tax demand on Cairn and 16 other companies, including Vodafone Group of UK.

These rules require the companies to withdraw all litigations against the government in return for being refunded any money that was collected to force the retrospective tax demand.

A format for the undertaking that the companies will have to furnish committing to withdraw litigations is under finalisation and should be released in coming days, they said.

Companies will have to use that format to give an undertaking, post which the money will be refunded.

In all the government has to return about Rs 8,100 crore, of which Rs 7,900 crore is due only to Cairn.

The British company had won an international arbitration award against levy of such taxes and sought to take over Air India assets when the government refused to honour the award and refund USD 1.2 billion-plus interest and penalty.

Cairn has indicated that the refund, without interest and penalty, was acceptable to it opening an avenue to settle the seven-year-old dispute.

Cairn and Air India in a joint request to US District Judge Paul Gardephe on September 13 stated that a stay on proceedings would give them "additional time to evaluate the effects and implications" of legislation that repealed the retroactive tax.

In return for the Rs 7,900 crore, Cairn would drop lawsuits threatening court-ordered seizures of Indian government property abroad.

One of those suits was filed in May against state-owned Air India Ltd, which Cairn has said should be considered the alter ego of the Indian government.

"The implementing regulations are in the rulemaking process and will take some time," the two had said in the petition seeking extension of the October 21 deadline for the presentation of case papers and initial pretrial conference on October 28.

They had requested the court to "stay any further proceedings in this matter through October 31, 2021, and reschedule the initial pretrial conference and, respectively, the deadline for the parties to submit their Joint Pretrial Letter and Proposed Case Management Plan, for new dates in November 2021."

"The Parties have conferred and agreed that the stay will facilitate the efficient resolution of the dispute, conserve the Court's and Parties' resources, and is not intended to obstruct or delay," they added.

Cairn had on May 14 brought a lawsuit in the New York district court to hold Air India liable as the alter ego of the Republic of India for the obligations the government owes under a foreign arbitral award. The firm separately filed a petition before the District Court for the District of Columbia to recognise and enforce the arbitration award against India on February 12, 2021.

Seeking to repair India's damaged reputation as an investment destination, the government last month enacted new legislation to drop Rs 1.1 lakh crore in outstanding claims against multinationals such as telecom group Vodafone, pharmaceuticals company Sanofi and brewer SABMiller, now owned by AB InBev, and Cairn.

About Rs 8,100 crore collected from companies under the scrapped tax provision are to be refunded if the firms agreed to drop outstanding litigation, including claims for interest and penalties.

An international arbitration tribunal in December overturned the levy of Rs 10,247 crore in taxes on a 2006 reorganisation of Cairn's India business prior to its listing. It also asked the Indian government to return the value of shares seized and sold, dividend confiscated and tax refund withheld. This totalled USD 1.2 billion-plus interest and penalty.

The government initially refused to honour the award, forcing Cairn to identify USD 70 billion of Indian assets from the US to Singapore to enforce the ruling, including taking flag carrier Air India Ltd to a US court in May. A French court in July paved the way for Cairn to seize real estate belonging to the Indian government in Paris.

All these litigations will be dropped once Rs 7,900 crore is paid, Cairn CEO Simon Thomson had told PTI earlier this month.