The proposed deal is between India's only nuclear power operator, the Nuclear Power Corporation of India Limited or NPCIL and the US-based operator, Westinghouse Electric Company.
According to sources, the NPCIL says the agreement is unfair since the deal waives off the right to recourse on part of the supplier. The Indian company is reluctant to limit the liability on part of the US-based operator.
The government was reportedly hoping to bypass the Indian nuclear law which makes the supplier liable for accidents.
This effectively means if a Fukushima-type tragedy occurs in a nuclear plant in India, the Indian tax-payer would have to bear its cost.
The government says it has the backing of the Attorney General of India, who had taken a similar stand while supporting the nuclear deal with Russia last year for the Kudankulam power plant.
The Attorney General says it's for the operator of the nuclear plant to decide whether the liability law should be upheld in the contract.
Sources say the NPCIL is under pressure to enter into agreement with the American firm ahead of the PM's US visit next week.
India is desperate to pursue a robust nuclear power policy for the foreign investment it is expected to attract.
The Indo-US civilian nuclear deal, signed in 2008, was billed as the cornerstone of the burgeoning strategic partnership between the two countries.
Five years later, the deal has not gone according to the script, and the US says the nuclear commerce has not benefitted the Americans who did most of the global diplomatic heavy lifting.