Dentsu IT raids: Is ‘royalty pivot’ leading Income Tax to India’s ad money?

The Income Tax Department’s searches at Dentsu India may have opened a far more uncomfortable question for the Japanese advertising giant than a routine tax dispute: how much of the money generated by Dentsu’s India operations ultimately remains taxable in India — and how much is moved overseas through royalty, intellectual-property and other related-party payments?

The department began searches at Dentsu-related premises in multiple offices across Mumbai and Delhi on Tuesday as part of a suspected tax-evasion investigation. The precise scope of the exercise has not been publicly disclosed.

People familiar with the developments said transactions between Dentsu’s Indian entities and overseas group companies are among the areas being examined, with royalty-related payments and other arrangements involving intellectual property likely to receive close scrutiny from tax authorities.

Dentsu India has not commented on the searches.

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The focus on royalty is significant because multinational advertising groups operate across a large pool of intangible assets, including global brands, proprietary technology, software, data platforms, methodologies, research tools and other intellectual property. Indian operating companies can make payments to overseas group entities for the right to use such assets.

Such payments are permitted under Indian tax rules, but cross-border royalty transactions can be subject to scrutiny over their tax treatment, pricing and the nature of the rights or assets involved. 

The Income Tax Department states that royalty paid to non-residents can be taxable in India and that tax is required to be deducted at source under Section 195, subject to applicable provisions and treaty benefits.

Why royalty matters in a multinational agency structure

In a typical multinational advertising network, the Indian operating company may generate revenue from local clients while using technology, platforms, intellectual property or other capabilities developed or owned elsewhere in the group.

Payments for these rights can therefore move money from the Indian entity to an overseas group company.

For tax purposes, such transactions fall within the broader framework of international transactions between associated enterprises. The Income Tax Department’s transfer-pricing guidance notes that transfer prices involving related multinational entities are subject to the arm’s-length principle and that authorities can examine the nature, terms, pricing and value of international transactions.

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An industry executive said royalty payments have increasingly become an area of attention as multinational companies rely more heavily on intangible assets.

“Royalty is a normal feature of multinational businesses, particularly where intellectual property is owned centrally. But once the payment is made to a related overseas entity, the company needs to be able to demonstrate the basis of the payment, the rights involved and how the amount was arrived at,” the executive said.

Another senior advertising executive said the structure of agency businesses makes these transactions more complex.

“Advertising groups have multiple layers of technology, data, intellectual property and global services. Some of these can be licensed while others can be provided as services. The tax authorities can look at the agreements and the actual nature of the transactions while assessing the tax treatment,” the executive said.

The royalty ‘pivot’

The term “royalty pivot” is being used by some industry executives to describe the role that royalty payments can play in the allocation of profits within a multinational group.

The concept is relatively straightforward. An Indian company that uses intellectual property belonging to an overseas group entity makes a payment for that right. The payment becomes an expense for the Indian company, while the overseas entity recognizes the corresponding income, subject to the tax treatment applicable in the relevant jurisdictions. The arrangement itself is not evidence of tax avoidance.

The issue for tax authorities is whether the payment is supported by a genuine commercial arrangement, whether the underlying intellectual property is actually being used, whether the pricing is appropriate and whether the transaction has been correctly characterised for tax purposes.

The Income Tax Department requires taxpayers involved in international transactions with associated enterprises to maintain documentation covering the nature and terms of the transactions, the property or services involved, their value and the functions, assets and risks of the parties involved.

A tax professional familiar with multinational structures said the documentation around royalty arrangements becomes particularly important during a search.

“Once a search takes place, the department can look at the agreements, financial records, emails and supporting documentation rather than relying only on the description appearing in the books. The objective is to understand the transaction and its commercial basis,” the professional said.

Dentsu’s earlier tax proceedings

Dentsu’s Indian businesses have previously featured in tax proceedings involving related-party transactions.

In a February 2026 ruling, the Mumbai bench of the Income Tax Appellate Tribunal considered a Dentsu Aegis Network India matter involving payments and recharges between group entities. The case included a dispute over salary-cost recharges and whether the expenditure had been adequately substantiated.

The proceedings involved domestic group entities and therefore do not establish a connection with the current searches or with overseas royalty payments.

However, they show that tax authorities have previously examined intra-group transactions within Dentsu’s India operations.

Why the accounting treatment matters

Royalty payments can affect the profitability of the Indian entity because they are generally recorded as expenses where applicable.

That makes the amount and basis of the payment relevant to the computation of taxable income.

Where an Indian company makes royalty or fees-for-technical-services payments to a non-resident, the applicable withholding-tax provisions also become relevant. The Income Tax Department states that Section 195 requires tax deduction on payments of royalty and fees for technical services to non-residents, subject to the applicable rules and treaty provisions.

For multinational agencies, the tax treatment can therefore involve several layers — the deductibility of the expenditure in India, withholding-tax obligations, transfer pricing and the taxation of the corresponding income in the overseas jurisdiction.

An industry executive said the scrutiny could have implications for how multinational agencies document global intellectual-property arrangements.

“Indian agencies increasingly use global platforms and technology. Companies will need strong documentation showing what is being licensed, which entity owns the IP, how the fee has been calculated and how the Indian business benefits from it,” the executive said.

India’s growing importance

The royalty issue comes at a significant time for Dentsu’s India operations.

India has emerged as one of the stronger markets within Dentsu’s international network, making the profitability of its Indian businesses increasingly important to the group.

For the tax authorities, the examination of cross-border payments therefore comes against a business structure in which substantial revenues are generated in India while parts of the technology, intellectual property and global capabilities used by the Indian businesses may sit with group companies outside the country.

A senior agency executive said the scrutiny of such arrangements was not unique to Dentsu.

“Every large multinational agency has some form of cross-border arrangement. There can be payments for technology, data, platforms, intellectual property and regional support. The important part is that each transaction has to be properly documented and supported,” the executive said.

What the searches could mean for royalty structures

The searches could result in closer examination of the agreements governing Dentsu’s inter-company payments and the financial records supporting those transactions.

Investigators may review royalty agreements, transfer-pricing documentation, invoices, payment records and related correspondence as part of the wider search operation.

The authorities could also examine whether payments classified under different categories relate to separate activities or capabilities, particularly where several group entities provide services to the same Indian business.

Another industry executive said the immediate impact could be greater compliance scrutiny across multinational agency groups.

“If royalty is an area being examined, the industry will look at its own arrangements as well. Companies will want to ensure that their agreements, transfer-pricing reports, withholding-tax positions and actual business practices are all consistent,” the executive said.

For Dentsu, the Income Tax searches have therefore brought the mechanics of cross-border payments into sharper focus.

The Income Tax Department has not disclosed the detailed scope of its investigation, and Dentsu India has not issued a detailed response.

For now, the royalty angle remains an important area of industry attention as tax officials examine Dentsu’s India operations and the financial relationships between its Indian businesses and overseas group entities.