The tribunal ruled unanimously that India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty and awarded Cairn damages of $1.2 billion, plus interest and costs, which now becomes payable, the company said in its statement.
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The tribunal also ordered the government to return the value of shares it had sold, dividends seized, and tax refunds withheld to recover the tax demand.
Including $200 million of interest and $20 million of arbitration cost, the total amount payable by the Indian government may go up to $1.4 billion or Rs 10,500 crore, more than Cairn's market value of $1.3 billion as of Tuesday's close.
For India, this is the second setback after losing another international arbitration case in September against Vodafone Plc over a $2 billion retrospective tax dispute.
Cairn's claim was brought under the terms of the UK-India Bilateral Investment Treaty, the legal seat of the tribunal was the Netherlands, and the proceedings were under the registry of the Permanent Court of Arbitration.
The order does not contain a provision for challenge or appeal against the award, but the Indian government may challenge it, and the Prime Minister's Office (PMO) will take a final call on challenging the award.
However, experts feel that it will send the wrong signal to the global investors, who want tax certainty, and anything retrospective on tax makes them nervous.
"The government must talk with Vodafone and Cairn to settle the matter amicably," Paras Bothra, President - Equities, Ashika Stock Broking, told ABP News.
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Cairn took the case to arbitration in 2015 to fight against demand in 2014 from Indian authorities for Rs 10,200 crore ($1.4 billion) in taxes it said were owed on capital gains related to the 2007 listing of its Indian unit, Cairn India.
In 2011, Cairn Energy sold its majority stake in Cairn India to Vedanta Ltd, reducing its stake in the Indian company to about 10%.
The Indian government seized the remaining shares in 2014 after the tax complaint was made and dividends Vedanta owed to Cairn Energy for its holdings in the Indian firm.
In 2018, Cairn Energy said it would write down the value of its investment in Vedanta after Indian tax authorities sold $216 million worth of its shares in the Indian mining company.
Besides Cairn Energy, the government also slapped a similar demand on its erstwhile subsidiary Cairn India (now part of Vedanta Ltd). Cairn India too has challenged the government's demand through a separate arbitration.
Vedanta shares closed up 8.2% at Rs 150.45 in a firm Mumbai market on Wednesday.