This problem is now rectified.
Everyone knows that Outlook 2007 and 2010 had issue with RRULE configuration from different email clients. e.g. Lotus Notes. I was not having that problem hence, I overlooked an obvious error in my application.
Our iCal files are generated on a NFS share which is mounted on various application servers. One of the application servers used to generate the iCal file and notify email sending queue to dispatch the email with attachment.
If email worker picks up the item before the iCal file is propagated to all shared mount-points, email worker used to send a 0 byte attachment of iCal file.
Funny enough, only Outlook used to cite this as a "not supported calendar attachment.ics". Other email clients used to show email without attachment file. This was easier for me to figure out as the attachment never got delivered to the email clients.
Only Outlook confused me because of its error message.
So if you're facing this issue, please check if your attachments are going fine then investigate if you're falling in the category of RRULE.
Hope this helps.