The decision against the Indian government in the Cairn Energy retrospective taxation arbitration case has put the former in a conundrum.

As the amount involved is huge, India could be forced to challenge the verdict by the International Court of Justice at the Hague, a source told Moneycontrol. A final decision on the matter is yet to be taken, however, and could take time as the government is still studying the verdict, the source added.

This could also influence the Centre's pending decision on whether to challenge the earlier Vodafone verdict as well.

"The government will be studying the award and all its aspects carefully in consultation with its counsels. After such consultations, the Government will consider all options and take a decision on further course of action, including legal remedies before appropriate fora," the government said in a press release.

As per the verdict, the Indian government would have to pay damages worth Rs 8,000 crore to Cairn. The verdict comes three months after India lost arbitration to Vodafone over the retrospective legislation.

The Rs 8,000 crore in damages includes the shares that were attached by the Income-Tax Department in 2014 and sold in 2018 to partially recover the tax dues. Cairn Energy held 4.95 percent stake in mining major Vedanta which the Income Tax Department attached after issuing a tax demand to Cairn.

The government has been asked to pay damages at the share value of Rs 330 in 2014, instead of the Rs 220-240 per share price at which it was sold by the Income-Tax Department in 2018, in tranches. The compensation also includes Rs 1,590 crore of tax refund due to the British oil major besides the legal fees.

Moneycontrol has learnt that the government is studying the verdict carefully before deciding the course of action, but there is a strong view that if the government fails to challenge these orders, it would lead to a plethora of such orders against the government.

The three-member tribunal, which also comprised a judge appointed by the Indian government, ruled that India's claim of Rs 10,247 crore in past taxes was not a valid demand. The case pertains to a Rs 24,500 crore tax demand on capital gains made by the oil major in reorganisation of its India business in 2006-07.

The tribunal asked India to pay the funds withheld along with the interest to the British oil explorer for seizing dividend, tax refund, and sale of shares to partly recover the dues.

The tax demand by India was in respect of Cairn UK transferring shares of Cairn India Holdings to Cairn India, as part of an internal group reorganisation in 2006-07.

This gave rise to different interpretations on whether the UK-based company made capital gains, preceding an initial public offering (IPO) of shares by Cairn India.

The I-T department had contended that Cairn UK made a capital gain of Rs 24,503.5 crore. Before the Cairn India IPO, the India operations of Cairn Energy were owned by a company called Cairn India Holdings-Cayman Island and its subsidiaries.

Cairn India Holdings was a fully owned subsidiary of Cairn UK Holdings, in turn, a fully owned subsidiary of Cairn Energy.

On September 24 this year, the Permanent Court of Arbitration at the Hague ruled that the Indian government seeking Rs 22,100 crore in taxes from telecom giant Vodafone — using retrospective legislation — was in “breach of the guarantee of fair and equitable treatment” under the bilateral investment protection pact between India and the Netherlands.