The UK’s Cairn Energy Plc has offered to forego $500 million and invest the sum 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 later, the government passed a 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 $1.2 billion (over Rs 8,800 crore) plus costs and interest, which totals $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 $500 million and invest that sum in any oil and gas or renewable energy project identified by Indian government if the principal of $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.

The Vivad se Vishwas scheme, which closed on March 31, provided for dropping of the tax case if 50 per cent 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 per cent 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.