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 on 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.

Parliamentary Affairs Minister Kamal Nath said the commission would submit its report within three months of its first sitting, while Antony warned he would pursue the wrongdoers.

"We will go to the root of the issue... We will see that this case reaches its logical conclusion," Antony told parliament's upper house.

He also threatened punitive action against Finmeccanica if police established that the Italian firm violated terms of the contract and used middlemen to influence the deal in favour of its helicopters.

"Whoever is guilty will be punished. No one will be spared and they will get the maximum punishment as per Indian law and as per the mutually-agreed integrity pact," he said.

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 helicopter 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.

Antony also tried to allay fears the deal's cancellation could set back India's ambitious programme of arming its million-plus military with latest hardware.

"There is a doubt this kind of action will affect the modernisation of our armed forces," he said, insisting the move would not impact India's "steady, continuous effort of our modernisation".