How to Review a Trademark Licence Agreement in India

A trademark licence agreement lets someone other than the brand owner use the mark, on goods or services the owner picks, under conditions the owner sets. The single most misunderstood point: this is not like a software or copyright licence. If the owner does not keep real control over the quality of what goes out under the mark, Indian law can treat the mark as abandoned, dead as a source-identifier, regardless of what the contract says about ownership. This guide is published by Adira, which makes contract review and CLM software, so we have a commercial interest in you reading licences carefully; it stands on its own even if you never buy anything from us, and if you just want to mark up one licence by hand, Weave, Adira's free browser tool, lets you do that without an account.

What a trademark licence agreement actually grants

A trademark licence should answer four questions precisely: which mark (by registration number, including logo, wordmark, or combination form), which goods or services (by Nice Classification class, not a vague "products"), which territory, and for how long. A licence that says "the Trademark" without a registration number, or "the Products" without a class list, invites a dispute the moment the licensee's product line changes.

Exclusive versus non-exclusive versus sole. Non-exclusive lets the owner license the same mark, for the same goods, to others, and keep using it. Exclusive shuts out everyone, including the owner. Sole sits in between: one licensee, but the owner keeps its own right to use the mark. Indian law does not define "sole licence" the way it defines "exclusive licence"; put the deal type into plain contract language rather than relying on a label.

Quality control: the clause that keeps the licence, and the mark, alive

This is the one part of a trademark licence that is not optional. A trademark exists in law to tell a buyer that goods of a certain quality come from a certain source. If the owner lets a licensee use the mark without controlling what goes to market, that link breaks down, and courts and trademark offices can treat the mark as having lost its distinctiveness, a problem lawyers call "naked licensing."

Section 49(1)(b)(i) of the Trade Marks Act, 1999 makes this concrete: an application to register a registered user must include a statement, on affidavit, of "the relationship, if any, subsisting between the registered proprietor and the proposed registered user, including particulars showing the degree of control by the proprietor over the permitted use which their relationship will confer." Control is not a formality; the Registrar wants the actual mechanism, inspection rights, sample approval, written specifications, that keeps the owner in charge of quality.

The Supreme Court set out why this matters in Gujarat Bottling Co. Ltd. v. Coca-Cola Co., (1995) 5 SCC 545, decided 4 August 1995. The Court held that a proprietor may permit another to use its mark, but only if the licence does not cause confusion or deception, does not destroy the mark's distinctiveness, and preserves a real connection in the course of trade between the goods and the proprietor, meaning the proprietor keeps the upper hand on quality control. Read the judgment. A licence that hands over the mark and walks away is not well drafted; over enough uncontrolled use, it is a mark the owner is quietly letting die.

Registered user recordal: s.48-49, and what happens if you skip it

"Registered user" and "permitted use" are the Act's own terms. Section 48 says "a person other than the registered proprietor of a trade mark may be registered as a registered user thereof in respect of any or all of the goods or services in respect of which the trade mark is registered," and Section 2(1)(r) defines "permitted use" as use by a registered user, connected in the course of trade, complying with whatever conditions the registration is subject to. Read Section 48, Section 49, and the definition.

Recordal is not automatic. The proprietor and the proposed licensee must jointly apply to the Registrar under Section 49(1), attaching the licence agreement and the affidavit on control described above. Skip this, and two things weaken. First, use by an unrecorded licensee is weaker evidence that the owner has been "using" the mark, relevant if the registration is ever attacked for non-use. Second, Section 52 lets a registered user sue an infringer in its own name, with the proprietor joined as a formal defendant, but that standing belongs to a registered user, not an ordinary licensee who never went through recordal; an unrecorded licensee typically has to ask the owner to sue.

Test: Ctrl+F the licence for "registered user." If it never appears, and the contract sets no deadline for filing the Section 49 application, raise that gap before you sign.

The Registrar can also cancel or vary a registered user's registration later, under Section 50, including where the user has used the mark other than in accordance with the agreement, or in a way likely to cause deception or confusion, or where a material fact was misrepresented on the original application. See Section 50. Another reason the quality-control mechanics need to be real, not paperwork.

Royalty, territory, and term

Royalty is usually a percentage of net sales, sometimes with a minimum guaranteed royalty regardless of actual sales, protecting the owner if the licensee under-performs. Check whether it is gross or net, what deductions apply before the percentage, and how often the licensee reports and pays, monthly and quarterly are both common. An audit right, letting the owner inspect sales records on notice, should not be missing.

Territory and term interact with the registered user filing directly: Section 49(1)(b)(iv) requires the application to state any conditions on the mode or place of permitted use, and whether it is for a defined period or without limit. A licence silent on territory, or one that says "worldwide" when the underlying registration only covers India, is a mismatch the filing will expose.

IP ownership and goodwill: it stays with the proprietor

A trademark licence should say expressly that the owner retains all right, title, and interest in the mark, and that any goodwill generated by the licensee's use accrues to the owner, not the licensee. This is the settled position: a licensee builds market recognition using someone else's mark, and the value that recognition creates belongs to whoever owns the mark. Silence here is not neutral; a licensee that has spent years building a mark's reputation can later argue it built goodwill of its own, and an explicit assignment-of-goodwill clause forecloses that argument before it starts.

A "licence" that is perpetual, irrevocable, and royalty-free, with no ownership language reserved to the owner and no quality control at all, invites a court reading the operative words to treat it as more than mere permission to use. Our IP assignment vs licence guide covers how Indian courts read "assign" against "licence" when a contract uses the words loosely, the same drafting trap in a different IP right.

Infringement enforcement and indemnity

Two questions live here: who enforces the mark against a third-party infringer, and who is liable if the licensed use itself infringes someone else's mark. On enforcement, a well-drafted licence sets out who has the first right to sue (usually the owner), whether the licensee, if a registered user, can sue under Section 52 if the owner declines to act within a stated window, and how recovery is split. On indemnity, the owner typically warrants that it owns the mark and that the licensed use will not infringe third-party rights, subject to carve-outs for the licensee's own modifications or use outside scope. Read that indemnity together with limitation of liability; one capped by the same low general cap as everything else is not doing much work if a serious claim lands.

Termination and phase-out

Termination in a trademark licence needs a mechanic most other contract types do not: what happens to goods already made, in the pipeline, or on shelves, once the licence ends. A "sell-off period," commonly 60 to 180 days, lets the licensee sell existing inventory after termination, subject to continuing royalty and quality standards, instead of an overnight destroy-or-relabel scramble. The clause should also require the licensee to stop all other use by the end of that window, and cooperate in cancelling the registered user recordal, since a stale entry left on the Register is a loose end the owner has to clean up later.

The Indian position: GST and withholding on royalty

GST. Trademark licensing is taxed under SAC 997336, within the wider heading 9973 (leasing or licensing of IP), at 18 percent, under Notification No. 11/2017-Central Tax (Rate). See the notification. This applies whatever the fee is called on the invoice, royalty, licence fee, or brand fee.

Withholding. Royalty for use of a trademark falls within the statutory definition of "royalty." Explanation 2 to Section 9(1)(vi) of the Income Tax Act, 1961 defines royalty to include consideration for "the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property." Read Section 9. For a domestic licensor, the licensee deducts TDS at 10 percent under Section 194J once the threshold is crossed. For an offshore licensor, the payer withholds under Section 195, generally at the Section 115A rate or the applicable tax treaty rate, whichever is more beneficial. Confirm the exact rate with a tax advisor; do not assume the Engineering Analysis software-royalty ruling carries over here, since it turned on copyright-specific language with no trademark equivalent.

Red flags table

Normal	Red flag	Why it matters
Quality control mechanism spelled out: approval of samples, inspection rights, written specifications	Licence grants use of the mark with no quality control mechanism at all	Uncontrolled use risks the mark being read as abandoned or deceptive
Licensed mark identified by registration number, class, and territory	"The Trademark," undefined, used for "the Products," undefined	Scope disputes the moment either party's product line shifts
Commitment to file the Section 49 registered-user application within a stated number of days	No mention of registered user or recordal anywhere in the agreement	Weaker enforcement standing and weaker evidence of use for the licensor
Goodwill from licensed use expressly assigned to the proprietor	Silent on goodwill	A long-running licensee can later argue it built goodwill of its own
Sell-off period after termination, with continuing royalty and standards	No phase-out mechanism; licence just "ends"	Licensee left holding branded inventory it can neither sell nor legally use
Royalty base (gross or net sales), minimum guarantee, and audit rights defined	Royalty stated as a bare percentage with no base or audit right	Owner cannot verify what it is actually owed
IP indemnity for third-party infringement claims, carved out of the general liability cap	No IP indemnity, or one folded into a low general cap	Licensee bears the entire risk of using a mark the owner never properly cleared

Bad clause versus better clause

Bad: "Licensor grants Licensee the right to use the Trademark on its products. This Agreement may be terminated by either party on 30 days' notice."

What is wrong: no registration number, no class or territory, no quality control obligation, no royalty mechanism, and a termination clause with no phase-out for branded stock already in the market.

Better: "Licensor grants Licensee a non-exclusive, non-transferable licence to use the Trademark [registration no. ●, classes ●] on the Licensed Goods within India, for a term of [●] years, subject to Licensee submitting samples for Licensor's prior written approval before each production run, and Licensor's right to inspect Licensee's quality records on 15 days' notice. The parties shall jointly file an application for Licensee's registration as a registered user under Section 49 within 30 days of execution. All goodwill arising from use of the Trademark shall accrue solely to Licensor. On termination for any reason, Licensee may sell existing finished inventory for 90 days, subject to continued royalty and quality obligations, and shall then cease all use of the Trademark and cooperate in cancelling its registered user recordal."

What changed and why: mark, class, and territory are now checkable specifics; quality control has actual mechanics, not a bare promise; the registered-user filing has a deadline; goodwill is expressly assigned; and termination has a defined sell-off window instead of leaving branded stock in limbo.

How this interacts with related clauses

The licence grant decides scope; IP assignment vs licence decides whether the document is actually a licence, or an assignment mislabelled; indemnity decides who pays if the licensed use infringes a third party's rights; and limitation of liability decides what that indemnity is worth in practice, since one sitting behind a low general cap is not fully uncapped.

US and global contrast

US trademark licensing runs on the same core doctrine, quality control keeps a licence from being "naked" and the mark from being abandoned, under the Lanham Act and cases like Dawn Donut Co. v. Hart's Food Stores. What differs is the paperwork: the US has no federal equivalent to India's Section 49 recordal, so a US licence needs no Registrar filing to be effective, though the quality-control substance still has to be real. A US template ported unedited into an Indian deal almost never covers the registered-user filing, because the concept does not exist in the source jurisdiction.

FAQ

What is the difference between a registered user and an ordinary trademark licensee? A registered user is a licensee whose licence has been formally recorded with the Trade Marks Registry under Section 49. An ordinary licensee has a valid contract but has not gone through that filing, which weakens its standing to sue infringers under Section 52 and weakens the licensor's evidence of continued use.

Does the licensee own any goodwill it builds up using the mark? No, if the licence is properly drafted. Goodwill generated through use of a licensed mark is generally understood to accrue to the proprietor, not the licensee, and a well-drafted licence says this expressly.

What happens to a licensee's stock if the licence is terminated? It depends on whether the agreement includes a sell-off period. Without one, the licensee has finished, branded inventory it can no longer sell. With one, typically 60 to 180 days, it can sell existing stock while still paying royalty and meeting quality standards.

Is GST payable on trademark royalty, and at what rate? Yes, 18 percent, under SAC 997336 within the broader IP-licensing heading 9973, regardless of whether the payment is labelled royalty, licence fee, or brand fee.

Do we have to deduct tax when paying trademark royalty to an Indian licensor? Generally yes, at 10 percent under Section 194J once the payment crosses the prescribed threshold. For an offshore licensor, Section 195 withholding applies instead, generally at the Section 115A rate or the applicable tax treaty rate, whichever is more favourable; confirm the figure with a tax advisor.

This guide explains how trademark licences are generally structured under Indian law: the registered-user mechanism, the quality-control principle that keeps a licence and the mark it covers valid, and the GST and withholding treatment of royalty. It is not legal advice, and it does not tell you whether your specific licence's mechanics are safe to sign in your situation. For that, especially before recording a registered user or negotiating a high-value licence, have a trademark lawyer review the actual documents.