Trademark Licensing in India: Registered User, Agreements, Royalties & Tax

Trademark Licensing in India: Registered User, Agreements, Royalties & Tax

Building a strong brand and then simply sitting on it is a missed opportunity for many Indian businesses. Once a trademark has real market recognition, it becomes an asset that can be licensed to franchisees, group companies, manufacturing partners, or distributors — generating royalty income without diluting ownership. Done properly, trademark licensing is one of the most effective ways to scale a brand beyond what a single company could achieve alone.

But licensing a trademark is not as simple as signing an agreement and collecting royalty cheques. Indian law distinguishes between registered and unregistered use, requires specific recordal steps to protect the licensor's rights, and triggers tax consequences on both sides of the transaction. This guide walks through everything a brand owner needs to know before licensing out (or taking a licence for) a trademark in 2026.

What Is Trademark Licensing

Trademark licensing is a legal arrangement where the owner of a registered trademark (the licensor) permits another person or business (the licensee) to use the mark on agreed goods or services, usually in exchange for a royalty or fee, while the licensor retains ownership of the trademark itself. Unlike an assignment, which transfers ownership permanently, a licence is a permission to use — the underlying rights stay with the original owner.

Common licensing scenarios include franchise businesses (a restaurant chain licensing its brand name to franchisees), manufacturing arrangements (a brand owner licensing its mark to a third-party manufacturer), group company structures (a holding company licensing its brand to operating subsidiaries), and merchandising deals (licensing a brand or character for use on unrelated product categories).

Registered User vs Unregistered (Permitted) User

Under the Trade Marks Act, 1999, there are two ways a licensee can use a licensor's mark, and the distinction matters a great deal for enforcement and evidentiary purposes.

Registered User

A registered user is a licensee whose permitted use of the trademark has been formally recorded with the Trade Marks Registry through the prescribed recordal process. Once recorded, this use is treated by law as if it strengthens the trademark's own use record, and the registered user gets certain statutory protections and standing, including in some circumstances the ability to take action against infringement jointly with or independently of the proprietor, subject to the terms agreed and the law's requirements.

Unregistered (Permitted) User

An unregistered or merely "permitted" user is a licensee who uses the mark under a private agreement with the owner, without that arrangement being recorded at the Registry. This use is still legally permissible and contractually valid between the parties, but it lacks the formal statutory recognition that comes with recordal, which can matter significantly if the trademark's validity, continuous use, or the licensee's standing is later challenged — for instance, in a non-use cancellation proceeding or a dispute over who can sue for infringement.

Why the distinction matters

Recording a registered user is particularly important where the licensee's use needs to be counted toward defending the trademark against a non-use cancellation application, or where the licensing structure is significant enough (large franchise networks, long-term manufacturing deals) that formal legal recognition adds real protective value. For smaller, short-term, or low-risk licensing arrangements, businesses sometimes proceed without formal recordal, accepting the reduced protection as a trade-off for simplicity and lower administrative cost — though this should be a considered decision, not a default.

Essential Clauses in a Trademark Licence Agreement

A well-drafted licence agreement is the foundation of the entire arrangement and should address at minimum the following:

1. Identification of the trademark(s) — registration number, classes, and the exact goods/services covered by the licence.
2. Scope of the licence — exclusive, non-exclusive, or sole licence; geographic territory; permitted goods/services; and whether sub-licensing is allowed.
3. Duration and renewal terms — the licence period, renewal conditions, and what happens on expiry.
4. Royalty and payment terms — the royalty rate or fixed fee structure, payment frequency, currency, and any minimum guaranteed royalty.
5. Quality control provisions — this is critical. The licensor must retain and exercise meaningful control over the quality of goods/services sold under the mark; without genuine quality control, the licence risks being treated as invalid and can even jeopardise the trademark's distinctiveness.
6. Usage guidelines — how the mark must be displayed (logo files, colour codes, permitted taglines), branding standards, and packaging requirements.
7. Termination clauses — grounds for termination (breach, insolvency, quality failures), notice periods, and post-termination obligations (immediate cessation of use, return of branded materials, de-branding of stock).
8. Infringement and enforcement — who has the right and obligation to pursue infringers, and how enforcement costs and recoveries are shared.
9. Confidentiality and non-compete — particularly relevant where trade secrets, recipes, or proprietary processes accompany the trademark licence.
10. Governing law and dispute resolution — jurisdiction, arbitration clauses, and applicable law.
11. Indemnity and liability — allocation of responsibility for third-party claims arising from the licensee's use of the mark.

Recordal Process — Filing Form TM-U

To register a licensee as a registered user, the parties (typically jointly, or the proprietor on behalf of the arrangement) must apply to the Registrar using the prescribed form (commonly referred to as TM-U) along with the licence agreement or an affidavit setting out the terms of permitted use, evidence of the relationship between the parties, and the quality control mechanism in place.

Broadly, the recordal process involves:

1. Executing a licence agreement (or affidavit summarising the terms) that clearly sets out the scope of permitted use and the quality control arrangement.
2. Filing the application with the Trade Marks Registry along with the requisite fee, supporting documents, and the affidavit from both the proprietor and the proposed registered user.
3. Registry examination — the Registrar reviews the application and may raise queries or seek clarification regarding the quality control provisions or scope of use.
4. Recordal on the Register — once approved, the registered user's details are entered against the trademark's record, and this is subsequently reflected in official trademark records and journal publications.
5. Renewal alignment — the registered user recordal generally needs to be kept current and reviewed alongside the underlying trademark's own renewal cycle and any changes to the licence terms.

Royalty Structuring

Royalty arrangements in trademark licensing are commercially negotiated and can be structured in several ways:

• Percentage of net sales or turnover — the most common structure, particularly in franchise and manufacturing licences.
• Fixed periodic fee — a flat licence fee payable monthly, quarterly, or annually, regardless of sales volume.
• Hybrid structures — a minimum guaranteed royalty combined with a percentage above a sales threshold.
• Lump-sum upfront fee — sometimes combined with ongoing royalties, particularly in franchise onboarding.

Royalty rates vary widely by industry, brand strength, and exclusivity granted, and there is no single "standard" rate in Indian practice — what is appropriate depends heavily on the sector, the brand's market recognition, and the specific rights conveyed, so businesses should benchmark against comparable industry arrangements and seek professional advice rather than relying on a generic figure.

Tax Treatment of Trademark Royalties

Royalty income and payments under a trademark licence attract multiple tax considerations that both licensor and licensee need to plan for:

• Income tax on royalty income — royalty received by the licensor is generally taxable as business income (or, in some structures, as income from other sources), and the applicable rate depends on the recipient's tax status, residency, and whether any specific presumptive or treaty provisions apply.
• Withholding tax (TDS) — payments of royalty are generally subject to tax deduction at source under the Income-tax Act, with the applicable rate and threshold depending on the nature of the payer/payee and whether the licensor is a resident or a non-resident (in which case Double Taxation Avoidance Agreement provisions may reduce the applicable rate, subject to conditions).
• GST on licensing services — licensing the right to use a trademark is generally treated as a supply of service under GST law and is typically taxable, so the licensor usually needs to charge and remit applicable GST on the royalty invoiced, subject to the current rate and any specific exemptions or place-of-supply rules that may apply to the transaction.
• Cross-border licensing — where the licensor or licensee is based outside India, transfer pricing regulations, withholding rates under applicable tax treaties, and RBI/FEMA reporting requirements for royalty remittances add further compliance layers.

Because tax rates, thresholds, and treaty benefits are periodically revised and depend heavily on the specific facts of each arrangement, licensors and licensees should always confirm the current applicable rates with a tax professional before finalising royalty terms.

Documents Required for Licensing and Recordal

• Certified copy of the trademark registration certificate
• The executed licence agreement or affidavit detailing terms of use and quality control
• Proof of identity and constitution of both licensor and licensee entities
• Board resolution or authorisation letter from both parties, where corporate entities are involved
• Power of Attorney for the professional handling the TM-U recordal filing
• Evidence of the quality control mechanism agreed between the parties

Timeline

• Drafting and negotiating the licence agreement: typically a few weeks, depending on deal complexity
• Filing the TM-U recordal application: can be done shortly after the agreement is executed
• Registry processing of the recordal: generally takes several months, subject to Registry workload and any queries raised
• Ongoing compliance: royalty invoicing, GST filings, and TDS compliance are recurring obligations throughout the licence term, not one-time events

Common Pitfalls

• Licensing a trademark without any real quality control mechanism, which can undermine both the agreement's enforceability and the mark's own distinctiveness
• Skipping the TM-U recordal for a significant, long-term licensing arrangement and later struggling to prove the licensee's use counts toward defending the mark
• Vague or missing termination and post-termination clauses, leading to disputes over continued use of the brand after the relationship ends
• Ignoring GST and TDS obligations on royalty payments, resulting in interest and penalty exposure
• Failing to align licence terms with the trademark's own renewal cycle, risking a lapse that undermines the licence itself
• Cross-border licensing without checking FEMA/RBI reporting requirements and applicable withholding tax treaty benefits

FAQs

What is the difference between a trademark licence and a trademark assignment?

A licence permits another party to use the mark while the licensor retains ownership; an assignment permanently transfers ownership of the trademark itself to the assignee.

Do I have to record every trademark licence with the Registry?

It is not always mandatory for the licence to be legally valid between the parties, but formal recordal as a registered user provides stronger statutory protection, particularly useful for significant or long-term arrangements and in defending against non-use cancellation.

What happens if there is no quality control clause in the licence agreement?

The absence of genuine quality control can weaken the agreement's standing and, in some circumstances, put the trademark's own validity and distinctiveness at risk, so this clause should never be omitted.

How is trademark royalty income taxed in India?

Royalty income is generally taxable as business income for the licensor, subject to applicable withholding tax (TDS) on payment, and the transaction is typically also subject to GST as a supply of service, though exact treatment depends on the specific facts and current rates.

Can a foreign company license its trademark to an Indian licensee?

Yes, cross-border licensing is common, but it involves additional considerations such as withholding tax under applicable double taxation treaties, transfer pricing rules, and FEMA/RBI reporting for royalty remittances.

Is there a standard royalty rate for trademark licensing in India?

No. Royalty rates are commercially negotiated and vary significantly by industry, brand strength, and the scope of rights granted, so benchmarking against comparable deals and professional advice is recommended.

Can a registered user sue for trademark infringement?

Depending on the terms of the licence and the specific statutory conditions met, a registered user may in certain circumstances have standing to take enforcement action, though this is generally subject to the agreement's terms and applicable legal requirements.

What documents are needed to record a registered user with the Trade Marks Registry?

Typically the licence agreement or a detailing affidavit, proof of identity/constitution of both parties, evidence of the quality control mechanism, and the prescribed recordal application (commonly TM-U) filed with the Registry.

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