India on Wednesday rejected denials by Italy's Finmeccanica that the company paid bribes to clinch a $748-million contract for 12 British-built helicopters.
India in mid-February put payments to the company on hold and asked the Italian firm to reply if any terms of the contract and an "integrity pact" it signed in 2010 had been violated in securing the deal.
Finmeccanica, whose chief executive was arrested on February 12 in Milan as part of a probe by Italian prosecutors, insisted in its response last week to the Indian government that it acted "correctly" in securing the deal.
"We do not believe the company's reply to the government's show-cause notice," Defence Minister A.K. Antony told parliament Wednesday during a debate on the contract.
Antony's statements came as the government agreed to set up a joint parliamentary commission including opposition MPs to probe charges that bribes were paid to swing the deal in favour of Finmeccanica's British unit AgustaWestland.
"We will go to the root of the issue... I want to give the maximum punishment to the guilty," Antony told the upper house of parliament.
He also threatened punitive action against Finmeccanica if police establish that the Italian firm violated terms of the contract and used middlemen to influence the deal in favour of its helicopters.
Indian police this week filed a "preliminary enquiry" report linking four companies, four Westerners, six Indians and a former Indian air chief marshal to the bribery allegations.
India's defence ministry announced earlier it had "initiated action for cancellation" of the helicopter contract.
The purchase came under scrutiny from Italian investigators looking into allegations the group had broken the law by paying bribes to foreign officials, leading to the arrest of Finmeccanica's boss Giuseppe Orsi.
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.