(Adds Finmeccanica comments)
By Anurag Kotoky and Nigam Prusty
NEW DELHI Nov 19 India has decided to cancel a scandal-tainted helicopter deal with Anglo-Italian firm AgustaWestland, three sources said, drawing a line under a dispute that has embarrassed a government heading into elections due next year.
The decision could re-open the contract to rivals, including United Technologies Corp's Sikorsky Aircraft, EADS' Eurocopter and Lockheed Martin.
It comes ahead of a meeting due to be held on Wednesday between executives from AgustaWestland, a division of Italian defence group Finmeccanica, and Indian defence ministry officials to discuss the contract.
Scrapping the 560 million euro ($757.40 million) deal to buy 12 helicopters to transport top politicians will not necessarily lead to New Delhi blacklisting Finmeccanica, sources have previously said, a move some officials fear would set back efforts to modernise India's military.
A defence ministry spokesman did not immediately respond to requests for comment.
The deal for the AW101 helicopters went off track in February after the then-chief executive of Finmeccanica was arrested by Italian police for allegedly paying bribes to secure the deal, prompting India to freeze payments.
Italy and India are separately investigating the allegations. AgustaWestland and Finmeccanica deny any wrongdoing.
A senior defence ministry official said there was no hope that AgustaWestland officials could salvage the deal in the meeting scheduled for Wednesday.
"This is just a face-saving exercise by Agusta. But the government has already decided to cancel the deal because they have violated the integrity pact," said one of two sources in the defence ministry who declined to be identified.
Under India's defence procurement rules, the integrity pact prohibits paying or accepting bribes. The government can cancel a contract if the pact is violated, and the seller has to forfeit any security money it deposited as a bidder.
In a statement on Tuesday, Finmeccanica said AgustaWestland had not been contacted by India's defence ministry over the possible cancellation of the deal.
The company, denying it had violated the contract, confirmed the meeting between AgustaWestland and the Indian defence ministry remained scheduled for Wednesday.
"AgustaWestland will deliver the formal written response to the exceptions raised by India's MOD (defence ministry)," it said.
Last month, AgustaWestland called for arbitration in the dispute, but defence ministry sources have said there is no case for this because the firm breached the integrity pact.
However, under the rules, it could still take the case to an Indian court.
AgustaWestland said last month that suspension of payment was not provided for under the terms of the contract and that Indian authorities had not responded to its requests for bilateral discussions since April.
India's federal auditor said in August the defence ministry had initially stipulated that the helicopters should be able to fly to an altitude of 6,000 metres (19,685 feet), which meant that AgustaWestland could not compete since the AW101 was certified to fly only to 4,572 metres (15,000 feet).
Later, the minimum altitude requirement was lowered to 4,500 metres (14,763 feet), even though the helicopters were expected to be used in mountainous northern and northeastern parts of the country where altitudes are higher, it said.
India took delivery of three helicopters before the deal stalled. Three more have been ready for delivery to India since April, three are close to completion and work has begun on the final three at AgustaWestland's plant in Britain, the company said.
The third source, an industry source, said on Tuesday that the decision to scrap the deal came as no surprise after India last month issued a final "show cause" notice to the firm seeking to end it.
"It does look like the ministry of defence is just going through the motions, that the result is pre-judged," said the source, who declined to be identified.
An AgustaWestland spokesman in New Delhi said the defence ministry had demanded confidentiality in the show-cause notice, and so he was unable to comment beyond restating the company's position that there was no evidence of wrongdoing.
Indian defence deals have been hit by a series of corruption allegations that have plagued sales agreements and hobbled efforts to beef up the armed forces, especially against perceived threats from neighbours China and Pakistan.
India is the world's largest arms importer and plans to spend $100 billion on defence equipment over the next decade. ($1 = 0.7394 euros) (Additional reporting by Agnieszka Flak and Stephen Jewkes in Milan; Editing by John Chalmers, Robert Birsel and Pravin Char)