The Australian government is prepared for the counter-offensive as leading cigarettes firm Philip Morris takes legal action against a planned marketing prohibition in the country.

Australia's Prime Minister Julia Gillard and Minister Nicola Roxon for Health and Ageing are not backing down from their plans that they said will make smoking less attractive to both adults and the youth.

"We're not going to be intimidated by big tobacco's tactics, whether they're political tactics, whether they're public affairs kind of tactics out in the community or whether they're legal tactics," she told ABC radio.

"We're not taking a backward step. We've made the right decision and we'll see it through."

Ms Roxon, in an interview with ABC's Alexandra Kirk said the government is confident of the strong legal ground in continuing with this legislation in spite claims by the cigarette firm Philip Morris that they might be violating the bilateral agreements it earlier signed.

"We believe that we are on very strong legal ground. We are breaking new ground around the world. This is the first time any country has taken this step and of course our Government would take proper advice to ensure that we can do that," Ms Roxon said.

She refused to give the details of all legal advice given to government, but Ms Roxon assured the public "that they can expect the Australian Government to be able to take action according to the community's interests and in the interest of public health."

Case for International Arbitration

In a statement, Philip Morris, which distributes popular cigarette brands Marlboro and Peter Jackson in Australia, said the forced removal of valuable intellectual property is a clear breach of the bilateral investment treaty between Australia and Hong Kong.

Philip Morris said it had served "a notice of claim on the Australian Government and warned damages could amount to billions of dollars as they go to arbitration."

Company spokeswoman Anne Edwards told The Australian newspaper that Phillip Morris does not take legal action lightly, but they "have no other option".

An arbitration dispute can cost much money for both parties and the government has been warned of the implications. Ms Roxon said the government is already spending millions for health care subsidies to support tobacco-related illnesses.

MP Roxon said they expected this action: "Well, they do because they make very large profits out of a lot of misery and death caused to thousands of Australians every year. So we already spend billions of dollars dealing with the harms caused from tobacco. Of course, we can't stop tobacco companies taking legal action. We'll defend our determination to protect public health and try to reduce the harms of smoking and ultimately I am confident that we are on very strong ground."

Tobacco giant Philip Morris says it is launching a legal challenge to the Federal Government's plain packaging laws, and has warned any compensation bill could run to billions of dollars.

The Government wants to force tobacco companies to sell their products in plain packaging without company logos and particular colours, saying the move will make smoking less attractive.

The company's Asian branch, which distributes popular cigarette brands Marlboro and Peter Jackson in Australia, says the forced removal of valuable intellectual property is a clear breach of the bilateral investment treaty between Australia and Hong Kong.

In a statement, Philip Morris said it had served a notice of claim on the Australian Government and warned damages could amount to billions of dollars.

Company spokeswoman Anne Edwards told The Australian newspaper that Phillip Morris does not take legal action lightly, but they "have no other option".

The Government says it always expected legal challenges to the proposed laws but it says it will push ahead with them anyway.

Leading manufacturer British American Tobacco Australia (BATA), also launched a related national media campaign against the Federal Government's proposed plan to impose plain packaging on cigarettes that could harm marketing and sales.