Sources said that the order to cancel the contract was signed by Defence Minister A.K. Antony, who earlier in the day met Prime Minister Manmohan Singh.
The decision came nearly a month after AgustaWestland submitted its reply to the final show cause notice issued to it by the government in February 2013.
A defence ministry statement said that the government has "terminated with immediate effect" the agreement that was signed with AgustaWestland International Ltd. (AWIL) on Feb 8, 2010, for supply of 12 VVIP/VIP helicopters "on grounds of breach of pre-contract integrity pact and the agreement by AWIL".
"Based on the opinion received earlier from the Attorney General of India, it has been the view of the government that integrity related issues are not subject to arbitrations. However, AWIL has since pressed for arbitration and appointed an arbiter from its side."
"In view of this, the MOD (ministry of defence) sought afresh the opinion of the Attorney General. With a view to safeguard the interest of the government, MOD has nominated Justice B.P. Jeevan Reddy as its arbitrator."
Facing the threat of the agreement being cancelled, AgustaWestland Nov 20 nominated retired Supreme Court Judge B.N. Srikrishna on its behalf for arbitration.
The deal with AgustaWestland - the British subsidiary of Italian defence major Finmeccanica - was scrapped more than a year after reports claimed that two top officials of the company allegedly paid bribes to bag the contract for the chopper maker.
AgustaWestland has already delivered three of the choppers and India has made partial payments.
The Central Bureau of Investigation is conducting probe into the alleged kickbacks and has registered an FIR which names former IAF chief S.P. Tyagi among others as beneficiary.
Others named in the FIR include Tyagi brothers - Julie, Docsa and Sandeep - Finmeccanica's former CEO Giuseppe Orsi, AgustaWestland's former CEO Bruno Spagnolini and alleged middlemen Guido Ralph Haschke, Karlo Valentino Ferdinando Gerosa, and Christian Michel.
Apart from 13 people, the FIR was also registered against four companies - Finmeccanica, AgustaWestland, Mohali-based IDS Infotech Ltd. (India), and Chandigarh-based Aeromatrix India.
The FIR states that Haschke and Gerosa managed to send 5.6 million euros through IDS Infotech and Aeromatrix to India and kept the remaining amount of about 24.30 million euros received from AgustaWestland with themselves in the account of IDS Tunisia.
The defence ministry in February issued a show cause cancellation notice to AgustaWestland and froze all further payments to the company after Orsi was arrested in Italy that month for allegedly paying bribes of Rs.360 crore to secure the deal.
Haschke was arrested in Switzerland in October on the request of Italian authorities probing allegations of bribery in the contract for the VVIP helicopters.
The opposition Bharatiya Janata Party (BJP) had accused the government of delaying probe in the deal and demanded that those who received payments should be identified and punished.
The party said that alleged middlemen, including Haschke, Gerosa and Michel, had received money in the deal and part of it had been sent to India through circuitous channels.
--IANS (Posted on 01-01-2014)