"The Defence Ministry issued a formal show cause notice to AgustaWestland seeking cancellation of the contract and taking other actions as per terms of the contract," Ministry spokesman Sitanshu Kar said.
The company was asked to explain the bribery allegations within seven days and reply why the contract of 2010 should not be cancelled.
The action came after the ministry received "some report" from Italy, sources said.
The External Affairs Ministry has also written to the Italian government, seeking information on the issue.
A CBI team is also being sent to Italy where the CEOs of AgustaWestland and its parent company Finmeccanica have been arrested on charges of bribery.
The Defence Ministry's notice comes a day after the ministry warned of legal action, including invoking integrity pact which provides for cancellation of the contract if bribes are paid and recovery of the money already paid.