Dentsu India Tax Raids 2026: Royalty & Transfer Pricing Rules

In early September 2026, India's advertising and media industry witnessed a significant regulatory development when the Income Tax Department conducted simultaneous searches across Dentsu India's offices in Mumbai, Delhi, Bengaluru, and Chennai. The raids, which began around 10 am on September 1, 2026, involved coordinated searches by Income Tax officials, raising critical questions about transfer pricing compliance and royalty payment structures used by multinational advertising networks operating in India.

For businesses engaged in cross-border transactions with parent companies abroad—particularly those involving royalty payments, brand licensing fees, or technology transfers—the Dentsu case serves as a crucial reminder of India's increasingly stringent transfer pricing enforcement regime. Understanding the legal framework, documentation requirements, and compliance obligations under Sections 92, 92CA, and 195 of the Income Tax Act has never been more critical.

Background: What Happened at Dentsu India?

The Income Tax Department conducted coordinated searches at Dentsu India's offices in Mumbai, Delhi, and Bengaluru, beginning at 10 am on Tuesday, focusing on employee documents and electronic devices. Dentsu India's offices in Mumbai, Pune, Delhi and Bengaluru were raided simultaneously on September 1, 2026, with authorities carrying out searches across the four cities.

Reports suggest the searches are part of an investigation into suspected tax evasion, with the income tax department's inquiry centering on transactions involving an Indian subsidiary, with Dentsu contesting tax claims of around ₹522.8 crore relating to alleged GST. Search warrants were issued to 20 companies, including Dentsu Aegis Network India, Dentsu Network Advertising, Dentsu Advertising and Media Services India, Dentsu Communications India, Dentsu Marketing Solutions, Dentsu Media India and Dentsu One.

Context: India's Growing Importance to Dentsu

The timing of these raids is particularly significant. Dentsu's financial disclosures show that India has been among the group's better-performing markets in 2026, with India being the only market in Dentsu's Asia-Pacific portfolio to record organic growth in the first quarter, even as the broader APAC segment declined 7.5%.

The latest action is the fourth major regulatory development involving Dentsu India in recent years, following a 2022 Income Tax Department search at Dentsu's Mumbai office in connection with an investigation involving one of its clients.

Understanding Transfer Pricing: Section 92 of the Income Tax Act

Section 92 of the Income Tax Act deals with the computation of income from international transactions between associated enterprises, aiming to prevent companies from manipulating their profits by shifting them across borders to lower-tax jurisdictions through artificially priced transactions.

What is Arm's Length Price (ALP)?

The arm's length price is the price at which two unrelated parties would transact in an open market, and Section 92 mandates that income from international transactions between associated enterprises must be computed using this principle. The arm's length principle ensures transactions between associated enterprises reflect fair market value, unaffected by group interests or internal pricing decisions.

For example, if Dentsu India pays a royalty of 8% of revenue to its Japanese parent company for use of brand names and proprietary methodologies, the Transfer Pricing Officer will examine whether unrelated companies in similar circumstances pay comparable royalty rates. If comparable independent transactions show royalty rates of 3-5%, the excess payment could be disallowed as a tax-deductible expense.

Which Transactions Are Covered?

Section 92B defines international transactions, covering sale, lease, services, cost-sharing, and lending/borrowing impacting profits or assets. International transactions covered include sale of goods, provision of services, financing arrangements, royalty payments, cost allocations, and anything that affects profits, income, losses, or assets of either party.

Common international transactions subject to transfer pricing scrutiny include:

• Royalty payments for brand names, trademarks, and technical know-how
• Management fees and head office cost allocations
• Interest on inter-company loans
• Purchase or sale of goods and services
• Software licensing and technology transfer fees
• Advertisement, marketing, and promotion (AMP) expenses

Royalty Payments: A Highly Litigated Transfer Pricing Issue

Royalty is one of the most litigated international transactions in the transfer pricing space in India. Royalty payments continue to face close scrutiny in TP disputes, particularly in cases involving advertising agencies, pharmaceutical companies, and technology firms.

Types of Royalty Payment Models

The compensation model adopted could be of various types: lump sum payment, running royalty (a fixed percentage of sales/profits, rate per unit), variable royalty (routine profits in India and balance profits remitted as variable royalty), or staggered royalty which varies according to the level of sales/profits.

Key Transfer Pricing Issues with Royalty Payments

During the course of assessment proceedings before the Transfer Pricing Officer (TPO) and subsequent forums, the common aspects scrutinized are the need-benefit for carrying out the royalty transaction between the assessee and its Associated Enterprise (AE) and the method of determining the Arm's Length Price (ALP).

The tax authorities typically examine:

• Commercial Justification: Whether the Indian entity derives actual benefit from using the intangible property
• Benchmarking: Whether the royalty rate is comparable to rates charged between unrelated parties
• DEMPE Analysis: Which entity performs Development, Enhancement, Maintenance, Protection, and Exploitation functions for the intangible
• Independent R&D Contribution: Whether the Indian entity has its own R&D team making improvements that benefit the group

Tax authorities must rely on comparable uncontrolled data and cannot question the commercial necessity of the payment, as royalty payments cannot be benchmarked at nil under the Comparable Uncontrolled Price (CUP) method, as ruled in recent tribunal decisions.

The Role of Transfer Pricing Officer: Section 92CA Powers

Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm's length price to the Transfer Pricing Officer.

Enhanced Powers Under Section 92CA

Amendments, effective from June 1, 2011, allow TPOs to determine the Arm's Length Price (ALP) for international transactions not initially referred by the Assessing Officer, provided these transactions were not reported by the taxpayer.

The Transfer Pricing Officer may, for the purposes of determining the arm's length price under this section, exercise all or any of the powers specified in clauses (a) to (d) of sub-section (1) of section 131 or sub-section (6) of section 133 or section 133A. This includes:

• Summoning and examining persons under oath
• Compelling production of books and documents
• Issuing commissions for examination of witnesses
• Conducting surveys and on-the-spot inquiries
• Examining electronic devices and digital records

In the Dentsu raids, personal phones and laptops have been confiscated, with parts of the building sealed and police present on the floors housing Dentsu offices, demonstrating the extensive search and seizure powers available to Income Tax authorities.

2026 Transfer Pricing Reforms

The Central Board of Direct Taxes (CBDT) on March 20, 2026, notified the final Income-tax Rules, 2026, which became effective April 1, 2026, including significant rationalization of the safe harbor regime, measures to expedite the advance pricing agreement (APA) process, and enhanced transfer pricing compliance standards.

Assessment timelines under the revised Rules have been compressed, reducing the period within which the Transfer Pricing Officer must complete the arm's length price determination, meaning corporates have less time to respond to information requests and must frontload evidence assembly.

TDS Compliance on Royalty Payments: Section 195 Requirements

Beyond transfer pricing compliance, companies making royalty payments to foreign parent entities must comply with withholding tax obligations under Section 195 of the Income Tax Act.

TDS Rates on Royalty Payments to Non-Residents

Section 195 of the Income Tax Act, 1961 mandates deduction of Tax Deducted at Source (TDS) on payments made to non-residents such as NRIs and foreign companies, covering payments like interest, royalty, professional fees, rent, and capital gains.

Under Section 115A of the Income Tax Act, royalty payments to non-residents are subject to withholding tax (TDS) at 20% plus applicable surcharge and cess, bringing the effective rate to approximately 20.8%, which was doubled from 10% to 20% effective April 1, 2023, through the Finance Act 2023.

DTAA Benefits and Form 15CA/15CB Compliance

DTAA benefits can reduce these rates significantly, as India has tax treaties with 90+ countries, and to apply the lower treaty rate, the non-resident must provide a Tax Residency Certificate (TRC) and Form 10F.

Before any royalty payment can be remitted to the foreign parent, the Indian subsidiary must complete Form 15CA/15CB compliance under Section 195 of the Income Tax Act. If the total royalty remittance exceeds ₹5 lakh in a financial year, Form 15CB (Chartered Accountant certificate) is mandatory.

Use TaxFetch's Income Tax Calculator to estimate your total tax liability including TDS obligations on foreign remittances.

Transfer Pricing Documentation Requirements

Full transfer pricing documentation kicks in when international transactions exceed ₹10 million (approximately ₹1 crore or ~USD 120,000) annually.

Form 3CEB: Transfer Pricing Audit Report

Companies engaged in international transactions must file Form 3CEB, a chartered accountant's report certifying compliance with transfer pricing regulations. Transactions may include purchase or sale of goods, provision of services, loans, guarantees or royalty payments, and even if such dealings are routine and commercially justified, the law requires them to follow arm's length pricing, which is where a transfer pricing audit report becomes necessary.

Three-Tiered Documentation Structure

Documentation Type	Applicability Threshold	Key Contents	Filing Deadline
Master File (Form 3CEAA)	Consolidated group revenue > ₹500 crore or international transactions > ₹50 crore	Global organizational structure, intangibles ownership, intercompany financial activities	Due date of ITR filing
Local File	International transactions > ₹1 crore	Detailed functional analysis, economic analysis, benchmarking study, ALP computation	Maintained by ITR due date
Country-by-Country Report (CbCR)	Consolidated group revenue > ₹6,400 crore (approx. €750 million)	Jurisdiction-wise allocation of income, taxes paid, employees, capital, assets	12 months from year-end

Verify your TDS deductions and tax credits using TaxFetch's Form 26AS / TDS Fetch Tool to ensure all withholding taxes on royalty payments are properly reflected.

Methods to Determine Arm's Length Price

The Income Tax Rules (Rule 10B) prescribe six methods for calculating ALP, with the right method depending on the nature of the transaction and the availability of comparable data.

Comparable Uncontrolled Price (CUP) Method

Arm's length price of royalty payments can be determined using Comparable Uncontrolled Price (CUP) method, as per which the price exchanged by transferring goods or services between two parties is compared to the price exchanged between the transfer of similar goods or services between an unrelated party.

For royalty benchmarking, the CUP method is preferred when:

• Internal comparables exist (royalty charged to unrelated third parties for similar intangibles)
• External comparables are available (licensing agreements between unrelated parties in similar industries)
• Adjustments can be made for differences in product, market, and contractual terms

Transactional Net Margin Method (TNMM)

The CUP method dominates (111 cases), followed by TNMM (62), reflecting the OECD's preference for direct comparables in licensing disputes but also the practical difficulty of finding them.

When CUP comparables are not available, TNMM is applied by comparing the net profit margin of the Indian entity with comparable independent companies performing similar functions.

Recent Judicial Developments on Royalty Transfer Pricing

In Samsung India Electronics (ITA 40/2018 (2024)), the court rejected the Indian Revenue Service's attempt to recharacterize the taxpayer as a contract manufacturer in the absence of supporting evidence, emphasizing that mere subsidiary status does not imply control by the parent, and the court relied on OECD guidance on intangibles and contract manufacturing to hold that the IRS must substantiate functional characterization with cogent material.

The tribunal in Sony India Pvt. Ltd. v. ACIT, ITA No. 9080/Del/2019 held that neither the BLT nor the intensity adjustment is a permissible method for benchmarking AMP expenses, and further ruled that royalty payments cannot be benchmarked at nil under the CUP method, as tax authorities must rely on comparable uncontrolled data and cannot question the commercial necessity of the payment.

In the JCB case, the company argued that the arm's length price for royalties should be 4%, in line with a Mutual Agreement Procedure (MAP) settled between Indian and UK tax authorities for previous years, and that a recently signed Advance Pricing Agreement (APA) for assessment years 2018-19 to 2022-23, which set the royalty rate at 5%, should guide the treatment.

Advance Pricing Agreements (APAs): A Proactive Compliance Tool

An APA is the preferred route when the transaction involves unique intangibles, royalty streams, cost-sharing arrangements or profit-split methodologies where comparables are scarce, with the upfront investment in professional fees and CBDT engagement justified by the multi-year certainty (typically covering five prospective years, with rollback for up to four prior years under unilateral APAs).

APA processing timelines have been tightened, with CBDT circulars mandating quarterly progress reviews for pending unilateral APA applications, and bilateral APAs now carry an explicit timeline expectation tied to the Mutual Agreement Procedure (MAP) with treaty partners.

Benefits of filing an APA for royalty transactions:

• Certainty on arm's length royalty rate for 5 prospective years
• Possibility of rollback for up to 4 previous years (unilateral APA)
• Elimination of transfer pricing adjustments and litigation
• Reduced compliance costs in subsequent years
• Bilateral/multilateral APAs provide certainty in both source and residence countries

Penalties and Consequences of Transfer Pricing Non-Compliance

India's transfer pricing penalties scale with the value of the transaction and the size of any tax adjustment, with headline numbers being 2% of transaction value for documentation failure, ₹1,00,000 for not filing Form 3CEB, and 100 to 300% of the tax on any adjustment treated as concealment of income.

Specific Penalties Under the Income Tax Act

• Section 271G: Penalty for failure to furnish documents or maintain information - 2% of value of international transaction
• Section 271BA: Penalty for failure to file Form 3CEB - ₹1,00,000
• Section 271(1)(c): Penalty for concealment of income or furnishing inaccurate particulars - 100% to 300% of tax sought to be evaded
• Section 270A: Penalty for underreporting and misreporting of income - 50% to 200% of tax on underreported income

In Dentsu's case, with disputed claims of ₹522.8 crore, if violations are established, the total tax liability including penalties could potentially exceed ₹1,000 crore.

Ensure accurate tax computation and avoid penalties by using TaxFetch's Income Tax Calculator for precise liability estimation.

Key Lessons for Multinational Companies Operating in India

1. Maintain Robust Transfer Pricing Documentation

The Dentsu raids underscore the importance of maintaining contemporaneous, comprehensive transfer pricing documentation. Companies should:

• Prepare detailed functional and economic analysis before year-end
• Conduct annual benchmarking studies using updated comparable data
• Document commercial rationale for royalty payments with benefit analysis
• Maintain Master File, Local File, and CbCR as applicable
• File Form 3CEB by the ITR due date without fail

2. Consider Advance Pricing Agreements

For companies with significant royalty payments or complex transfer pricing structures, filing for an APA with CBDT provides multi-year certainty and eliminates the risk of costly adjustments and litigation.

3. Ensure Section 195 TDS Compliance

Deduct TDS at applicable rates (20% or lower DTAA rate) on all royalty payments to non-residents, file Form 15CA/15CB for remittances exceeding ₹5 lakh, and file quarterly Form 27Q returns to report TDS on payments to non-residents.

4. Conduct Periodic Transfer Pricing Health Checks

Engage transfer pricing specialists to review your intercompany agreements, pricing policies, and documentation annually to identify potential red flags before tax authorities do.

5. Leverage Safe Harbour Rules Where Applicable

The Government of India has introduced proposals for a reform of the Safe Harbour rules for transfer pricing as part of the Union Budget 2026, with planned relief measures impacting companies operating in the fields of software, IT, knowledge management, and other technology-enabled services.

Conclusion: Navigating India's Evolving Transfer Pricing Landscape

The September 2026 Income Tax raids on Dentsu India serve as a stark reminder that India's tax authorities are intensifying scrutiny of transfer pricing practices, particularly royalty payments to foreign parent entities. With tax claims of ₹522.8 crore at stake, this case highlights the significant financial and reputational risks of transfer pricing non-compliance.

Transfer pricing regulations in India, introduced under Sections 92 to 92F of the Income Tax Act, 1961, govern cross-border transactions between associated enterprises to prevent tax arbitrage, and based on OECD Guidelines, Indian transfer pricing rules mandate arm's length pricing, extensive documentation, and penal provisions for non-compliance by multinational enterprises.

For businesses engaged in international transactions—whether you're an advertising agency paying brand licensing fees, a pharmaceutical company remitting technology royalties, or an IT services firm allocating shared costs—proactive transfer pricing compliance is no longer optional. It's a business imperative.

Stay ahead of compliance requirements, document your arm's length pricing methodology thoroughly, consider filing for APAs for material transactions, and ensure timely TDS compliance under Section 195. The cost of non-compliance, as the Dentsu case demonstrates, can run into hundreds of crores in tax, interest, and penalties.

Ready to ensure your transfer pricing and tax compliance? Use TaxFetch's comprehensive suite of tax tools to calculate your tax liability, verify TDS credits, and stay compliant with India's complex tax regulations. From income tax calculators to TDS verification tools, TaxFetch simplifies tax compliance for businesses and individuals across India.

Frequently Asked Questions

What is the Dentsu India income tax raid about?

In September 2026, the Income Tax Department conducted coordinated searches at Dentsu India offices in Mumbai, Delhi, Bengaluru, and Chennai investigating suspected tax evasion of approximately ₹522.8 crore. The inquiry centers on transactions involving royalty payments to foreign parent entities and alleged GST issues. This marks the fourth major regulatory action against Dentsu India in four years, with the investigation focusing on whether international transactions between Dentsu India and its associated enterprises comply with transfer pricing regulations under Section 92 of the Income Tax Act.

What is Section 92 of the Income Tax Act?

Section 92 of the Income Tax Act governs transfer pricing rules for international transactions between associated enterprises. It mandates that any income arising from international transactions must be computed based on the arm's length price (ALP) - the price that would be charged between unrelated parties under similar circumstances. This provision, introduced through Sections 92 to 92F, prevents profit shifting and tax base erosion by ensuring that cross-border transactions with related entities reflect fair market value, preventing companies from artificially manipulating prices to reduce tax liability in India.

How are royalty payments taxed under transfer pricing rules?

Royalty payments to foreign parent companies are classified as international transactions under Section 92B and must be priced at arm's length. The Transfer Pricing Officer (TPO) evaluates royalty rates using methods like Comparable Uncontrolled Price (CUP) or Transactional Net Margin Method (TNMM). Under Section 195, the Indian subsidiary must deduct TDS at 20% (effective rate 20.8% with surcharge and cess) on royalty payments to non-residents, unless a lower rate is available under Double Taxation Avoidance Agreements (DTAA). Companies must file Form 3CEB and maintain comprehensive transfer pricing documentation to justify the royalty rate paid.

What are the penalties for transfer pricing non-compliance?

Transfer pricing non-compliance attracts severe penalties under the Income Tax Act. Failure to maintain proper documentation results in a penalty of 2% of the transaction value. Not filing Form 3CEB can lead to a penalty of ₹1,00,000. If the Transfer Pricing Officer determines that the arm's length price differs from the transaction price, adjustments are made to taxable income, potentially resulting in additional tax liability. Where concealment of income is established, penalties can range from 100% to 300% of the tax amount. Given that the Dentsu case involves ₹522.8 crore in disputed claims, potential penalties could run into hundreds of crores if violations are substantiated.

What is the role of the Transfer Pricing Officer under Section 92CA?

Section 92CA empowers the Assessing Officer to refer computation of arm's length price for international or specified domestic transactions to a Transfer Pricing Officer (TPO) with prior approval from the Principal Commissioner or Commissioner. The TPO, who must be a Joint Commissioner, Deputy Commissioner, or Assistant Commissioner authorized by CBDT, has extensive powers under Section 92CA(7) to exercise investigation powers under Section 131, conduct surveys under Section 133A, and examine books, documents, and electronic records. The TPO determines whether the transaction price complies with arm's length pricing principles and can make adjustments to the taxable income if deviations are found.