The blurred image of what seemed to be the England football captain's head and upper body was spotted on various cigarette packets above the words, 'Smoking Kills'.
The Indian government's Directorate of Visual Publicity used the image as part of an anti-smoking drive, according to The Indian Express.
However, Elite Management, which represents Chelsea footballer Terry, told the BBC that it had not given consent over the image.
The agency said in a statement: "It's been brought to our attention that an image of our client has been used on some cigarette packaging without our consent or knowledge. We've now instructed our legal team to investigate this matter."
The Indian Express quoted the Directorate of Visual Publicity's secretary KS Dhatwalia as saying: "We sent the creative to the health ministry and they then cleared it and circulated it. But how Terry's picture got to be used is not clear."
This is not the first time that the Indian government has been forced to apologise over its advertising.
In 2010, an ad campaign for India's Commonwealth Games athletes featured the backdrop of aircraft trails in the colours of the Italian rather than Indian flag.
In the same year, the Indian state of Meghalaya was forced to withdraw school textbooks that featured images of Jesus clutching a cigarette and a can of beer.
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