The government has rejected a proposal by Russia to set up a manufacturing facility in India for AK-series assault rifles in partnership with the Adani Group, official sources said.
The decision comes amid a controversy over the Rs 58,000 crore Rafale aircraft deal with France.
The sources said Russia proposed the joint venture during Defence Minister Nirmala Sitharaman's visit to Moscow in April for production of the AK-103 rifle.
AK-103 is a modernised variant of the AK-47 rifle, which is extensively used by India's armed forces.
The sources said, according to existing policy, Russian defence firm Kalashnikov Concern can only partner government-owned Ordnance Factories for the project.
"The Russian proposal to partner with a private firm has been rejected. They have the option of joining hands with a government firm for the project," said a source.
The proposal from Russia came when the Army was aiming at procuring around 7 lakh rifles.
India had signed an inter-governmental agreement with France in September 2016 for procurement of 36 Rafale fighter jets at a cost of around Rs 58,000 crore.
The Congress has raised several questions about the deal including rates of the aircraft while the government has rejected the charges.