India on Wednesday cancelled a 556-million-euro ($753 million) contract with Anglo-Italian firm AgustaWestland to buy luxury helicopters for VIPs amid bribery allegations.
File picture shows a new AgustaWestland AW159 Wildcat helicopter at the Farnborough International Airshow in Hampshire, southern England, on July 11, 2012
The deal signed in February 2010 was scrapped after Defence Minister A. K. Antony held a meeting with Prime Minister Manmohan Singh whose Congress-led government has been buffeted by a string of corruption scandals.
A defence ministry statement said the government had "terminated with immediate effect the agreement" with AgustaWestland International Ltd (AWIL) to supply 12 helicopters "on grounds of breach of a pre-contract integrity pact and the agreement by AWIL".
India suspended the deal in 2013 after Italian investigators began looking into accusations that AgustaWestland paid bribes to win the contract.
The Italian boss of AgustaWestland's parent company Finmeccanica was arrested last February over the case -- touching off a firestorm in India.
The latest move by the Indian defence ministry is seen as a government attempt to contain the fallout from the corruption scandal before elections due by May.
In November, the helicopter maker had sought arbitration to try to salvage the contract, a request that the Indian government had rejected.
But India has now appointed its own arbitrator "with a view to safeguard the interest of the government", the defence ministry statement said.
The government had believed "integrity-related issues are not subject to arbitrations," the statment said.
"However, AWIL (AgustaWestland) has since pressed for arbitration and appointed an arbiter from its side.
"In view of this, the Ministry of Defence (MOD) sought afresh the opinion of the attorney general.
"With a view to safeguard the interest of the government, the MOD has nominated Justice B.P. Jeevan Reddy as its arbitrator."
Italian prosecutors suspect kickbacks worth around 10 percent of the deal -- $67.6 million (50 million euros) -- were paid to Indian officials to swing the deal in favour of AgustaWestland, according to Italian media reports.
India has already received three of the helicopters, intended to be used by such dignitaries as the prime minister and the president, but Antony halted deliveries of the remaining nine.
India's auditor general said in a report last year that the defence ministry "deviated from procurement procedure and tender on several instances in the deal" including altitude requirements.
Indian detectives raided the home of former air force chief S.P. Tyagi as part of the probe into the allegations of bribery. Tyagi has denied any wrongdoing.
Cash was allegedly handed to Tyagi's cousin, with more money funnelled via a web of middlemen and companies in London, Switzerland, Tunisia and Mauritius.
The purchase also came under scrutiny from Italian investigators probing allegations the Italian group had broken the law by bribing foreign officials.
The company denies any wrongdoing. A spokesman for the company in India was not immediately available to comment on the latest developments.
The cancellation is expected to be a major blow to AgustaWestland, which has a factory in southwest England. The decision will also be a severe setback to Finmeccanica, whose chief executive Giuseppe Orsi resigned from behind prison bars last February.
Orsi denies any wrongdoing and his lawyer has called the allegations against him "inconsistent" and his arrest "unjustified".