Indian tax officers searched the BBC's bureaus in New Delhi and Mumbai on Tuesday, two sources told Reuters, just weeks after the government dismissed a BBC documentary on the 2002 Gujarat riots as "propaganda".
"The Income Tax Authorities are currently at the BBC offices in New Delhi and Mumbai and we are fully cooperating. We hope to have this situation resolved as soon as possible," the BBC said in a statement.
The tax department did not respond immediately to emails seeking comment.
One of the sources in the BBC's New Delhi office said that tax officials were speaking with the accounts officer and no one was allowed to leave.
While the search was underway, television news crews set up outside the office near Connaught Place, in central Delhi, to report developments.
The main opposition Congress party condemned the tax department's actions.
Modi's Bharatiya Janata Party (BJP) said Indian institutions work independently and the tax department was "within law in looking into tax compliance".
"India is a vibrant democracy where no one is above the law," Gopal Krishna Agarwal, a BJP spokesman, said.
Last month, police in Delhi detained students as they gathered to watch the documentary that focused on Prime Minister Narendra Modi's leadership role in the deadly riots.
India's foreign ministry in January said the documentary was meant to push a "discredited narrative", was biased, lacked objectivity and showed a "continuing colonial mindset". The BBC has stood by its reporting for the documentary.
Modi has always denied any wrongdoing. In 2013, a panel appointed by the Supreme Court said there was insufficient evidence to prosecute him.
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