A World Trade Organization panel ruled Wednesday in favour of a US claim that India's rules restricting what products can be used in its solar industry breach international trade regulations.
WTO's dispute settlement board ruled that India's requirement that only Indian-made products be used in large parts of its rapidly expanding solar power industry were "inconsistent" with a range of global trade regulations.
Washington hailed the decision.
"This is an important outcome, not just as it applies to this case, but for the message it sends to other countries considering discriminatory 'localisation' policies," US Trade Representative Michael Froman said in a statement.
The United States had complained to the WTO in 2013 that India's rules discriminated against US makers of solar cells and modules.
According to the statement, the country has seen its solar exports to India plunge 90 percent since New Delhi in 2011 imposed the so-called domestic content requirements on solar power developers selling electricity to the government.
After consultations between the two countries failed, the issue was sent before the global trade body's dispute settlement board in May 2014.
The panel had been expected to rule on the issue within six months, but its decision has repeatedly been pushed back as the two sides continued to negotiate.
India, whose solar industry has grown rapidly in the past few years as the government looks to ease reliance on imported fossil fuels and coal, has previously defended its policies.
But in its ruling, the WTO panel rejected India's arguments that the policy was needed to avoid disruption in imports and to ensure compliance with the country's requirements to promote sustainable development.
WTO, which polices global trade accords in an effort to offer its 162 member economies a level playing field, called on India to bring its solar industry rules into line with international standards.
The parties now have 60 days to appeal the WTO ruling if they wish to do so.