National auditor CAG has slammed the defence ministry and air force for deviation from rules in the Rs 3,727-crore deal for procurement of VVIP choppers from Italian-owned AgustaWestland, which is under investigation for bribery.
Italy and India are separately investigating charges that AgustaWestland paid bribes to win the deal for 12 (AW101) helicopters.
India froze payments to the company in February as the scandal unfolded. It had taken delivery of three helicopters before the deal was stalled.
"Several instances have been observed where the defence ministry deviated from the 2006 defence procurement procedure and the tender for the deal issued in September 2006," the Comptroller and Auditor General (CAG) said in a report tabled in Parliament on Tuesday.
The CAG also questioned the decision of the air force chief in 2007, SP Tyagi, to conduct the trials of the two contenders for the deal abroad.
The auditor said trials for the AgustaWestland model were conducted on representative Merlin helicopters and not on the actual craft, whereas the other contender, Sikorsky, had offered its S-92 for try-outs.
"Thus, the recommendation and assurance given by the chief of air staff (Tyagi) in October 2007 to conduct trials abroad lacked justification," the report said.
The CAG also said the defence ministry had initially set a condition that the helicopters should be able to fly to an altitude of 6,000 metres, which meant that AgustaWestland could not compete since the AW101 was certified to fly only to 4,572 metres.
Later, the minimum altitude requirement was lowered to 4,500 metres, even though the helicopters were expected to be used in the mountainous north and northeast parts of the country, it said.
Indian investigators raided Tyagi's home as part of a separate probe into allegations that bribes helped swing the deal in favour of AgustaWestland, which is based in Britain but owned by Italian firm Finmeccanica.
The former air force chief has denied any wrongdoing in the chopper deal.
Italian prosecutors suspect kickbacks worth around 10% of the deal were paid to Indian officials to ensure AgustaWestland won the contract, according to Italian media reports.
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.
Bruno Spagnolini, former CEO of AgustaWestland, and Giuseppe Orsi, former chairman of Finmeccanica, are being tried in Italy on the accusations in the Indian deal. Both deny wrongdoing.
The Italian arrest warrant for Orsi and Spagnolini, seen by Reuters, said the Indian tender was changed to deliberately favour the Italian firm.