Dentsu under tax lens: Why ‘royalty’ payments could become a bigger industry problem

The Income Tax Department’s searches at Dentsu India are putting a deceptively routine line item under an unusually sharp lens: royalty. For multinational advertising networks, payments to overseas group entities for intellectual property, technology, data platforms and other global capabilities are a familiar part of the business model. 

But the Dentsu probe raises a bigger question for the industry—whether such payments can withstand scrutiny over the value actually received in India, how they are priced and whether they are genuinely linked to the business, or whether tax authorities could begin treating them as a channel through which profits are shifted out of the country.  

Read earlier e4m report on royalty pivot in Dentsu probe

IT officials examined financial records, technology-related data, servers and supporting documentation. According to people familiar with the developments, the scrutiny has also extended to government-linked advertising, election-related campaigns and influencer-led campaigns.

But the “royalty pivot” may ultimately prove to be the more consequential part of the exercise.

Read earlier report on raids at dentsu

Sources familiar with the matter have indicated that tax officials are looking closely at transactions between Dentsu’s Indian businesses and overseas group entities, particularly payments described as royalty, intellectual-property-related fees and other cross-border charges. 

The issue is not that royalty payments are inherently impermissible. Such payments are a normal feature of multinational businesses and can be legitimate under Indian tax law.

The harder question is whether the underlying transaction can withstand scrutiny when the tax department looks beyond the accounting entry.

Is royalty pivot leading IT dept to ad money? Read earlier e4m report

That distinction could make the Dentsu case important for the wider advertising industry.

The real question behind the royalty investigation

A multinational advertising network can have a complicated internal financial structure. An Indian operating company may use technology platforms, proprietary tools, research systems, data products, intellectual property and other capabilities developed or owned by group entities outside India. 

When dentsu raids rattled Japan HQ. Read more here

Consequently, payments may flow from the Indian company to overseas associated enterprises under different contractual descriptions. Tax authorities, however, can examine whether the label attached to the payment corresponds with the economic reality.

IT officials are understood to be examining agreements, payment records and the nature of the intellectual property or services for which Indian entities made payments. They may also examine who owns the underlying IP, how the fee was calculated, whether the Indian business actually used the relevant rights or technology and whether it received a corresponding commercial benefit.

That is where the issue moves from accounting to substance.

Pranshu G, Partner at Ashok Pranshu & Co, says the exposure could potentially travel well beyond Dentsu. “The exposure can have a waterfall effect across the industry.”

His point is particularly significant because the potential tax risk does not necessarily stop with one transaction or even one agency. If search material identifies similar structures involving other agencies, vendors or group entities, those parties could potentially attract enquiries. 

Even companies with no direct connection to Dentsu could face scrutiny if they use comparable arrangements for royalty, brand, technology or intellectual-property payments to overseas associated enterprises.

That makes the Dentsu investigation potentially bigger than a dispute over one expense line.

It raises a broader industry question: How much of the profit generated by an Indian advertising operation is genuinely attributable to the local business, and how much is being allocated to overseas group entities for the use of global IP, technology and capabilities?

A royalty agreement may not be enough

This is perhaps where the legal advice becomes most uncomfortable for multinational agencies.

Pranshu points out that having a royalty agreement and evidence that money was remitted overseas may not, by themselves, provide a complete defence. The documentation has to establish what rights or benefits were actually received, how those rights were commercially exploited in India and why the amount paid was commercially and economically justified.

In other words, the tax department can potentially ask a much more basic question: Show us what India received

That question becomes harder when the underlying assets are intangible.

Unlike a physical machine, an advertising network’s proprietary platform, data capability, research tool or intellectual property may not have an obvious market price. The same global capability could support businesses in multiple countries, making it difficult to isolate precisely how much value should be attributed to the Indian entity.

That is why transfer pricing becomes central.

Another tax legal expert cited that royalty paid to a related overseas entity inherently carries transfer-pricing risk. Unique intangibles can make direct comparables difficult to identify. 

In suitable cases, taxpayers may therefore benchmark closely linked transactions on an aggregated basis under the Transactional Net Margin Method (TNMM) and demonstrate that the resulting operating margin is comparable with independent enterprises. Recent jurisprudence also recognises aggregation where royalty is intrinsically linked to the underlying business activity.

But that is not a guaranteed safe harbour.

Where reliable royalty comparables exist, tax authorities may seek a more direct benchmarking approach. The practical defence, therefore, is not simply to point to an acceptable operating margin. Agencies need a functional analysis, evidence of ownership and actual use of the IP, documentation of the expected commercial benefit and contemporaneous support for the royalty rate.

The legal expert’s formulation is telling: the strongest defence is a combination of substance, consistent conduct and a defensible methodology.

That could become one of the most important takeaways for the agency industry.

The potentially bigger exposure: tax, interest and penalties

For Dentsu, the consequences could also extend beyond the treatment of one category of expenditure.

Shourya Garg, Founder of Garg & Garg Tax Associates, says the legal exposure could go beyond a one-time tax demand. “The legal exposure here goes well beyond a one time tax demand."

If the department ultimately takes the view that an arrangement was primarily designed to shift profits out of India, Garg says it could potentially result in reassessment of earlier years, interest and penalty proceedings and, in more serious circumstances, action relating to concealment of income.

There is also an operational cost.

A search itself can disrupt business, while subsequent scrutiny can continue for years before a final liability is determined, Garg notes.

That distinction matters for companies because tax exposure is not necessarily limited to the eventual number on an assessment order. The process itself can impose a significant compliance and management burden.

Why campaign records matter to the wider probe

The royalty investigation is only one part of what officials are understood to be examining.

Sources familiar with the developments have said that officials have sought records relating to government advertising, election-linked campaigns and influencer-led campaigns, including campaigns connected with the CJP protests.

So why would such records matter to a tax investigation?

Because a large advertising campaign can create a dense financial trail.

An agency may receive a mandate from a client, purchase media through multiple platforms, appoint production companies, engage specialist vendors and separately work with influencers. Government and election-linked campaigns can involve additional approvals, contracts, work orders and billing structures.

For investigators, campaign-level documentation can therefore provide another way of checking whether revenues and expenses recorded in the books correspond with the underlying commercial activity.

It also gives tax officials another potential map of the money.

Where does India’s advertising money ultimately go?

This is where the Dentsu searches could acquire significance beyond the company itself.

The Indian advertising business is increasingly intertwined with global technology, data, research and intellectual-property infrastructure. A multinational agency can therefore have several layers of inter-company payments: royalty, technology fees, management fees, service charges and other forms of cross-border remuneration.

Each category can have different tax consequences.

The question for tax authorities is not simply whether money moved overseas. Multinational businesses routinely make legitimate cross-border payments.

The more provocative question is whether the economic value of what was received by the Indian company justifies the cost charged to it.

That is a much more difficult question to answer with a contract alone.

The scrutiny can therefore cut across several tax concepts at once, including deductibility, withholding tax, treaty characterisation, transfer pricing and remittance compliance.

That is why the royalty pivot matters.

It potentially gives investigators a framework for asking not merely how Dentsu booked costs, but how value and profits move through a global advertising network.

The ‘waterfall effect’ for the agency industry

Pranshu’s “waterfall effect” warning could ultimately prove to be the most important industry-level implication.

If the department identifies a particular structure as problematic, the immediate consequences would be specific to the facts and entities involved. But other multinational agencies could nevertheless begin reviewing their own arrangements simply because they use similar global operating models.

Large agency networks routinely rely on global technology platforms, proprietary data products, research tools, IP and centralised capabilities. Payments to overseas group companies are therefore not unusual.

What may change is the standard of evidence companies expect to maintain around those payments.

The industry may increasingly have to demonstrate that the contract, invoice, transfer-pricing report and actual conduct all tell the same story.

A royalty agreement saying one thing while internal communications, usage patterns or accounting records suggest something different could become considerably more difficult to defend.

Dentsu’s earlier tax history adds context

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

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

That proceeding involved domestic group entities and does not establish a connection with the current searches or prove anything about overseas royalty payments.

But it does show that intra-group transactions within Dentsu’s India operations have previously attracted tax scrutiny.

The current investigation, if it progresses, could therefore put a much wider set of cross-border arrangements under the microscope.

The bigger test may be the documentation

For the wider agency industry, perhaps the most immediate lesson is less dramatic than “royalty equals profit shifting”.

It is this:

Can an agency prove, years after a transaction was entered into, why the payment was commercially necessary, what was actually received and why the price was reasonable?

That is a documentation test as much as a tax test.

Emails, agreements, invoices, payment trails, transfer-pricing studies, technology records and evidence of actual IP use can collectively become critical in establishing commercial substance. 

The department’s access to digital records could allow investigators to compare the contractual arrangement with how the relationship actually operated.

This is also where the agency industry may face an uncomfortable reality.

A multinational network can have perfectly legitimate reasons for paying an overseas group entity. But legitimacy needs to be demonstrated through evidence—not simply assumed because the payment was made under a signed inter-company agreement.

What happens next?

For now, the Income Tax Department has not publicly disclosed the detailed scope of its investigation, and Dentsu India has not issued a detailed response to the searches.

The immediate question is whether the search ultimately leads to a formal tax assessment, demands, penalties or further proceedings—or whether the department concludes that the transactions under examination are adequately supported.

But the larger significance of the case may already be visible.

The searches appear to be looking beyond a narrow accounting exercise. The royalty pivot points towards the movement of value, costs and profits between Dentsu’s Indian businesses and overseas group entities, while the examination of government, election and influencer campaigns potentially gives investigators a parallel view of the underlying revenue and expenditure trails.

And that is what makes the Dentsu investigation potentially consequential for the entire agency sector.

The real issue is not whether multinational advertising companies should be allowed to pay royalties to overseas group entities. They can, subject to the applicable tax rules.

The question is whether, when challenged, they can demonstrate that every rupee deducted in India corresponds to a real right, service, capability or economic benefit—and that the price paid for it can withstand an independent tax examination.

If the Dentsu search ultimately produces a broader tax position on how global agency networks allocate the cost of technology, IP and other centralised capabilities, the impact could extend well beyond Dentsu.

The “royalty pivot”, in that sense, may not just be about royalty. It could become a test of who gets to claim the profits generated by India’s advertising economy—and on what evidence.