India's Central Bureau of Investigation also is studying the report by the Comptroller and Auditor General, which was tabled in Parliament for further scrutiny.
The report is a further blow for beleaguered $745 million deal signed with AgustaWestland in February 2010, The Economic Times reported.
AgustaWestland is a subsidiary of the Italian state-controlled defense giant Finmeccanica.
The AW101 aircraft are being supplied by AgustaWestland's division in the United Kingdom to replace Mil Mi-8 helicopters that are near the end of their technical life.
Information given by Defense Minister A.K. Antony to questions in Parliament in November indicated the AW101 deal was signed after a global tendering process involving multiple vendors.
Antony had previously said the contract for the helicopters contains standard provisions against use of undue influence and employment of agents and payment of agency commission. A pre-contract integrity pact was signed between AgustaWestland and the Ministry of Defense.
But after bribery allegations surrounding the contract surfaced in February, India stopped payments to AgustaWestland, although three of the contracted 12 three-engine AW101 helicopters configured for VIP transport had been delivered.
In its report, the CAG questioned the decision by then-Indian Air Force Chief S.P. Tyagi to hold the air trials of the contract contenders abroad, The Economic Times reported.
The newspaper said the CBI is examining telephone transcripts said to contain several conversations related to alleged remittances made to cousins of Tyagi and other middlemen to clinch the deal.
The CAG report noted that the benchmark cost for the 12 aircraft was "unreasonably high" compared to what AgustaWestland offered.
"Several instances have been observed where the Defense Ministry deviated from the 2006 Defense Procurement Procedure and the tender for the deal issued in September 2006," the CAG report stated.
Tyagi is one of 13 people being investigated in India for involvement in alleged bribery, The Economic Times reported.
After a police raid on his house in March, Tyagi denied charges that he or his relatives were paid bribes.
The BBC reported that the CAG report puts more pressure on India's embattled Congress-led coalition government at the center of several corruption allegations in the run-up to elections next year.
The Indian government said in May it had no plans to bar AgustaWestland from bidding for further aviation contracts even though the company is under scrutiny in India as well as Italy.
Former Finmeccanica Chief Executive Officer Giuseppe Orsi and AgustaWestland division CEO Bruno Spagnoli went on trial in June in Italy on corruption charges.
Finmeccanica and AgustaWestland deny any wrongdoing and said they are cooperating with investigators.