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India on Friday said it had taken steps to cancel a $748 million contract for 12 Italian helicopters amid allegations that the deal was won through kickbacks.
The ministry of defence said in a statement it had "initiated action for cancellation" of the contract for 12 helicopters from AgustaWestland, a unit of Italian aerospace group Finmeccanica, intended for use by top politicians.
The ministry issued a "show-cause" notice to Finmeccanica -- a legal step asking the company to justify why the contract should not be cancelled.
India, which has already put payments to the company on hold, asked the Italian firm to "reply within seven days" if any terms of the contract and an "integrity pact" it signed in 2010 had been violated.
The decision is a severe blow to Finmeccanica, whose chief executive was arrested earlier this week in Milan as part of a probe by Italian prosecutors.
The purchase came under scrutiny from Italian investigators probing allegations the group had broken the law by paying bribes to foreign officials, leading to the arrest of Finmeccanica's boss Giuseppe Orsi on Tuesday.
Italian prosecutors suspect that kickbacks worth around 10 percent of the deal, or 50 million euros ($68 million), were paid to Indian officials to ensure AgustaWestland won the contract, press reports say.
Cash was allegedly handed to a cousin of former Indian air force chief S.P. Tyagi, who denies wrongdoing, with more money funnelled via a web of middlemen and companies in London, Switzerland, Tunisia and Mauritius.
Orsi denies any wrongdoing and his lawyer has called the allegations against him "inconsistent" and his arrest "unjustified".
The latest move by the Indian defence ministry is seen as an attempt by the government to contain the fallout from the corruption scandal ahead of elections in the first half of next year.
Defence Minister A.K. Antony on Tuesday ordered an Indian police investigation.
The Indian unit of Transparency International, a global anti-corruption watchdog, welcomed New Delhi's move to invoke clauses in the "integrity pact" which it said could lead to cancellation of the deal as well as blacklisting of the Italian firm.
The chopper deal was cleared by Indian Prime Minister Manmohan Singh, whose Congress-led government has been buffeted by a series of corruption scandals that analysts say could affect the party's electoral chances in 2014 polls.
The scandal will also overshadow a visit to India next week by British Prime Minister David Cameron amid fears of delay in other negotiations for lucrative defence contracts.
AgustaWestland, a wholly owned Anglo-Italian unit of Finmeccanica, was manufacturing the helicopters at its plant in southwest England.