Ottavio Quattrocchi had been wanted since the scandal, which involved Swedish arms manufacturer Bofors, first broke 20 years ago and implicated the Gandhi political dynasty.
"The fugitive Italian buisnesman wanted in the Bofors payoff case has been detained by Argentine authorities," The Times of India newspaper said.
The case centres on accusations that Quattrocchi took bribes from AB Bofors for brokering the sale of 410 Howitzer field guns to Delhi in 1986.
Güncelleme Tarihi: 20 Eylül 2018, 18:16
"Significantly the government chose to keep the matter under wraps for a fortnight," the paper said.
Reported to be close to the head of India's Congress party, Italian-born Sonia Gandhi, Quattrocchi was detained on February 6.
India was informed two days later. He was held under an Interpol notice issued at the request of India's Central Bureau of Investigation (CBI) 10 years ago.
India has until March 8 to seek his extradition from Argentina.
Quattrocchi has always maintained his innocence saying his only crime was being a friend of Rajiv Gandhi, the former prime minister, who was assassinated in 1991, leaving his widow Sonia at the helm of the dynasty.
The CBI has been critcised for failing to bring Quattrocchi back to India to face justice, amid allegations of political influence.
The agency was embarassed last January when Britain unfroze the Italian's bank accounts after it failed to supply evidence to prove the money was connected to the case.
Indian ministers and officials at the time distanced themselves from the case and the agency, with the law minister declaring there was no evidence against Quattrocchi.
But the CBI insists that Quattrocchi is still a wanted man in India and must face charges.
In 2005, the Delhi high court dismissed similar charges against the three Europe-based Hinduja brothers as well as against the late Rajiv Gandhi.
The scandal has dogged Indian politics ever since it erupted in 1986 and contributed to the defeat of Congress in 1989.