The Statutory Framework

Registered user or not: the practical decision

Our general advice: record the registered user where the licensee is exclusive, long-term, materially invested, or is the principal user of the mark in India — particularly where a foreign proprietor licenses to an Indian operating company, since the recordal is what evidences use in India for non-use purposes. Where the licence is short, non-exclusive or one of many, a written agreement with genuine quality control usually suffices.

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Quality Control: The Clause That Keeps the Trademark Alive

A trademark indicates origin. When a proprietor permits another party to apply the mark without maintaining control over the character or quality of the goods or services, the mark stops indicating anything reliable — and the licensor’s own rights are placed at risk.

“Naked licensing” — a licence with no meaningful quality control — exposes the proprietor to arguments that the mark has become deceptive or has lost its distinctiveness, and to rectification under Section 57. Section 50 separately empowers the Registrar to vary or cancel a registered user entry where the mark has been used otherwise than in accordance with the agreement or in a way likely to deceive or cause confusion.

Control must be real, not recited. A clause stating that the licensor “shall have the right to control quality” achieves nothing if no approval is ever sought, no sample is ever inspected and no audit is ever conducted. A licence file that shows approvals given, samples tested and inspections carried out is what makes the control provision credible.

What a workable quality control regime contains:

• Written specifications for the goods or services, incorporated as a schedule
• Brand guidelines — logo usage, colour values, typography, minimum sizes, clear space, prohibited alterations, use of the ® symbol and proprietary notices
• Pre-approval of artwork, packaging, labelling, advertising and store or outlet design, with a defined submission format and a deemed approval timeline so the process does not stall the licensee’s business
• Sample submission at defined intervals, and on any change of specification, supplier or manufacturing location
• Inspection and audit rights — premises, manufacturing facilities, records — on notice, at defined frequency
• Third-party testing where product safety or regulatory standards apply
• Rejection and remedy — the licensor’s right to reject non-conforming goods, require withdrawal, and set a cure period
• Consequences — suspension of the licence, recall obligations, and termination for persistent failure
• Regulatory compliance — FSSAI, BIS, Legal Metrology packaging and labelling, Drugs and Cosmetics, ASCI advertising standards, as the sector requires

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Types of Brand Licence

Franchise agreements: a note on Indian law

India has no dedicated franchise legislation and no mandatory pre-sale disclosure document of the kind required in some other jurisdictions. Franchising is governed by general contract law, the Trade Marks Act, the Competition Act, 2002, the foreign exchange and tax regimes for cross-border arrangements, and any sector-specific regulation. The absence of a statutory disclosure regime places the entire burden on the agreement itself, which is why Indian franchise documentation needs to be more, not less, detailed than in regulated jurisdictions.

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The Clauses That Decide the Outcome

1. The grant

State unambiguously whether the licence is exclusive, sole or non-exclusive — and remember that a genuinely exclusive licence excludes the licensor as well. Define the marks by registration number and class, the goods or services precisely, the territory, the channels (physical retail, e-commerce marketplaces, own website, exports, duty free), and the term.

2. Schedule of marks

Registration numbers, classes, current status, renewal dates and pending applications. Include the copyright in the logo artwork and any registered designs for packaging or product shape — a trademark licence alone does not license the artwork.

3. Royalty and the royalty base

The most litigated definition in brand licensing is “Net Sales”. Specify exactly:

• Whether royalty is on gross sales, net sales, or ex-factory value
• Which deductions are permitted — GST and other taxes, trade discounts, returns and credits, freight and insurance, and whether they must be separately stated on the invoice
• Treatment of free goods, samples, promotional units and bundled products
• Treatment of inter-company and related-party sales, priced at what value
• Minimum guaranteed royalty per period, and whether it is recoupable against running royalty
• Advance payments and how they are set off
• Escalation over the term
• Currency, exchange rate mechanism and the date of conversion
• Payment timing, and interest on late payment
• Audit rights — frequency, notice, access to records, appointment of an independent auditor, and who bears the cost if an underpayment above a threshold is found

4. Reporting

Format, frequency, level of detail, SKU-level or aggregate, certification by the licensee’s finance function, and the licensor’s right to require reconciliation with GST returns.

5. Marketing and brand investment

Minimum marketing spend as a percentage of sales, contribution to a common marketing fund, approval of campaigns and creative, and ownership of the creative produced.

6. Ownership of the brand and accrual of goodwill

• The licensee acknowledges the licensor’s title and that all goodwill from its use accrues to the licensor
• The licensee will not register the mark, any confusingly similar mark, any domain name or any social media handle incorporating the mark, anywhere
• The licensee will not adopt a company or trade name incorporating the mark
• Any registration obtained in breach is to be assigned to the licensor on demand, with an irrevocable power of attorney to effect it
• Note that a clause prohibiting the licensee from challenging validity should be drafted with care, and the commercial concern is better addressed through a termination right than an outright prohibition

7. Maintenance and enforcement

• Who is responsible for renewals, and a step-in right for the licensee to renew if the licensor fails, with reimbursement
• Obligation on the licensee to notify the licensor of any infringement or imitation it becomes aware of
• Who controls enforcement, who bears costs, and how recoveries are shared
• The Section 52 mechanism where a registered user is recorded
• Cooperation obligations — evidence, witnesses, documents

8. Warranties and indemnities

The licensor warrants ownership, authority to license, and that the registrations are subsisting. Validity is ordinarily not warranted. The licensee indemnifies the licensor against product liability, regulatory breach, and consumer claims arising from its goods or services — and this is not a boilerplate matter in merchandising and food, where product liability insurance with the licensor named as additional insured should be a condition.

9. Term, renewal and termination

Termination rights for material breach with a cure period, persistent quality failure, failure to meet minimum royalties or minimum sales, insolvency, change of control, and conduct damaging the brand’s reputation.

10. Post-termination — the clause licensors most often regret omitting

• Immediate cessation of all use of the marks
• A defined sell-off period for existing finished inventory, with quantities certified and a cut-off date, or alternatively a buy-back mechanism
• Destruction or delivery up of packaging, labels, signage, promotional material and artwork files
• Transfer of domain names, social media handles, marketplace seller accounts and app listings to the licensor, with an irrevocable authority to effect transfer
• Removal of signage and de-branding of premises and vehicles, at the licensee’s cost
• Cancellation of the registered user entry
• Return of confidential information and operating manuals
• Non-use of confusingly similar marks after termination, and a restriction on passing the outlet off as a former outlet of the brand
• Survival of confidentiality, indemnity, audit and accrued payment obligations

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Competition, Tax and Regulatory

Competition Act, 2002

Section 3(5) preserves the right to impose reasonable conditions necessary to protect intellectual property rights, so ordinary field, territory and quality restrictions are not, by themselves, anti-competitive. The exemption is not unlimited. Tie-in arrangements, exclusive supply and distribution obligations, refusal to deal and resale price maintenance fall within Section 3(4) and are assessed on their effects, and abuse of a dominant position under Section 4 is not exempted at all. Franchise systems that fix resale prices or force sourcing of unbranded inputs from the franchisor are the usual pressure points.

Tax

• GST applies to the licensing of intellectual property as a supply of service; classification, rate and place of supply must be determined for the arrangement, particularly for exports and cross-border licences
• TDS on royalty payments — under Section 194J for domestic payments and Section 195 for payments to non-residents, with treaty analysis and Form 15CA and 15CB compliance
• Transfer pricing — where a brand is licensed between associated enterprises, the royalty must be at arm’s length. Both charging no royalty and charging an unsupportable one attract scrutiny, and brand royalty is among the most litigated transfer pricing issues in India. Contemporaneous benchmarking and a documented commercial rationale are essential for group brand licences
• Stamp duty on the licence agreement, which varies by state

Foreign exchange

Payment of royalty and lump-sum fees to a foreign brand owner is permitted under the automatic route subject to the conditions in force. A foreign licensor should also note that a foreign trademark registration confers no rights in India — the mark must be registered here, and an Indian address for service maintained, before the licence is worth much.

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Where Brand Licences Fail

1. No written agreement at all between group companies using the same house mark, weakening the portfolio against a non-use challenge
2. Quality control recited but never exercised — no approvals sought, no samples tested, no audits conducted
3. “Exclusive” licence that does not actually exclude the licensor
4. Royalty base undefined, producing a dispute at the first audit
5. No minimum guaranteed royalty, so an exclusive licensee can sit on the territory and do nothing
6. No audit rights, or audit rights with no access to records
7. Licensing the trademark but not the copyright in the logo artwork
8. Registered user not recorded where the licensee needed the Section 52 enforcement right
9. Renewal responsibility unallocated, and the registration allowed to lapse mid-term
10. No post-termination provisions, so the licensee keeps the domain, the handles and the inventory
11. Sub-licences granted without authority, or surviving termination of the head licence
12. Product liability and insurance unaddressed in merchandising and food licences
13. Territory and channel ambiguity, particularly on e-commerce marketplaces and exports
14. Intra-group royalty set without benchmarking, creating transfer pricing exposure
15. Resale price maintenance and forced sourcing clauses in franchise agreements, exposed under the Competition Act
16. The licensee registering the mark, a variant, or the domain in its own name during the term

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How Delhi Legal Company Handles Brand Licensing

• Pre-licence audit — confirming the marks are registered, subsisting, renewed, correctly owned and cover the goods and territory being licensed, and identifying gaps to be filed before the deal is signed
• Structuring — licence versus franchise versus distribution, exclusivity, territory and channel carve-outs, and the tax, competition and exchange control consequences of each
• Drafting and negotiation — trademark licences, franchise agreements, merchandising and character licences, co-branding agreements, master licences and sub-licence templates, and intra-group brand licences
• Quality control architecture — specifications, brand guidelines, approval workflows with deemed approval timelines, inspection and audit rights that a licensor can realistically operate
• Royalty engineering — net sales definitions, minimum guarantees, audit clauses and reporting formats drafted to be enforceable rather than aspirational
• Registered user recordal on Form TM-U under Section 49, including the proprietor’s affidavit
• Companion IP — copyright licence for the logo artwork, design licences for packaging and product shape, and know-how and confidentiality documentation
• Compliance review — Competition Act, 2002 screening, GST and withholding treatment, transfer pricing considerations for related-party licensing, and FEMA for cross-border royalty
• Enforcement and exit — infringement action, licensee breach, termination, post-termination recovery of domains and handles, and rectification where a licensee has registered the mark

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Frequently Asked Questions (FAQs)

1. What is a brand licensing agreement?

A. It is a written contract by which the owner of a trademark permits another party to use the mark on defined goods or services, in a defined territory, for a defined period, usually in return for royalties, while ownership of the mark and the goodwill arising from its use remain with the licensor.

2. Is a trademark licence required to be in writing in India?

A. Yes, in substance. Section 2(1)(r) defines permitted use as including use by a person with the proprietor’s consent in a written agreement, and the registered user route under Section 49 requires the agreement to be filed. An oral or informal arrangement leaves both the licence and the registration exposed.

3. Do I have to register the licensee as a registered user?

A. It is not compulsory. A written licence with genuine quality control is recognised, and the Supreme Court accepted unregistered licensing in Gujarat Bottling Co. Ltd. v. Coca Cola Co. However, recordal has a real commercial advantage, because only a registered user has the enforcement rights under Section 52.

4. What is the benefit of recording a registered user?

A. Under Section 52, a registered user may call upon the proprietor to institute infringement proceedings and, if the proprietor refuses or neglects to do so within three months, may institute proceedings in its own name, joining the proprietor as a defendant. Section 53 expressly denies that right to an unregistered permitted user.

5. Which form is used and what is filed with it?

A. Form TM-U, filed jointly by the proprietor and the proposed registered user under Section 49, together with the written agreement or a duly authenticated copy, and an affidavit by the proprietor setting out the degree of control over the permitted use, whether the user is sole, the goods or services covered, any conditions or restrictions, and the duration.

6. Does licensing my trademark protect it from removal for non-use?

A. Yes, provided the licence is genuine. Section 48(2) deems permitted use to be use by the proprietor for the purposes of Section 47 and any other purpose for which use is material. This is precisely why group companies using a holding entity’s house mark should have a documented licence rather than an undocumented practice.

7. What is naked licensing and why is it dangerous?

A. Naked licensing is licensing without meaningful control over the quality and character of the licensee’s goods or services. Because a trademark indicates origin, a mark used without such control ceases to indicate anything reliable, and the proprietor becomes exposed to arguments that the mark has become deceptive or lost distinctiveness, and to rectification under Section 57.

8. How much quality control is enough?

A. Enough that it is actually exercised. Written specifications, brand guidelines, pre-approval of artwork and packaging, periodic sample submission, inspection and audit rights, and a rejection and cure mechanism — combined with a file that shows approvals actually given and inspections actually carried out. A control clause that is never used is worth very little.

9. What is the difference between a trademark licence and a franchise?

A. A trademark licence grants the right to use the mark. A franchise grants the mark together with the business system — know-how, operating manual, training, supply arrangements and continuing operational control — usually for an initial fee plus a running royalty. India has no dedicated franchise statute or mandatory disclosure document, so the agreement itself carries the entire burden.

10. Does a trademark licence also cover my logo artwork?

A. No. The artistic work in a logo is protected by copyright under the Copyright Act, 1957 and requires its own licence, which must be in writing. Character and merchandising deals almost always need both a trademark licence and a copyright licence, and packaging or product shape may additionally require a design licence.

11. What is the difference between exclusive, sole and non-exclusive?

A. An exclusive licence excludes everyone else including the licensor. A sole licence means no further licences will be granted but the licensor may still use the mark itself. A non-exclusive licence permits use alongside the licensor and any number of other licensees. Calling a licence exclusive while reserving the licensor’s own use is a drafting error with real commercial consequences.

12. How is royalty usually structured?

A. Commonly an upfront or lump-sum fee, plus a running royalty as a percentage of net sales, often with a minimum guaranteed royalty per period. The critical drafting question is the definition of the royalty base — what deductions are allowed and how free goods, samples, bundles and related-party sales are treated.

13. Why does the “net sales” definition matter so much?

A. Because it determines what you are actually paid on, and because it is the clause most frequently litigated. Whether taxes, trade discounts, returns, freight and insurance are deducted before the percentage is applied can change the royalty materially, and vague drafting produces a dispute at the first audit.

14. Should I insist on a minimum guaranteed royalty?

A. In any exclusive or sole arrangement, yes. Without one, an exclusive licensee can hold a territory or a category and do nothing with it, blocking you from appointing anyone else. The minimum guarantee is what converts exclusivity into an obligation to perform.

15. What audit rights should a licensor have?

A. The right to inspect books and records on reasonable notice, at a defined frequency, through an independent auditor, with the licensee bearing the cost where an underpayment above a stated threshold is found, together with the right to reconcile reported sales against GST returns and statutory filings.

16. Who pays for renewing the trademark during the licence?

A. Whoever the agreement says, and it must be stated. The licensee should have a step-in right to renew and recover the cost if the licensor fails, because a lapsed registration destroys the value of the licence and leaves the licensee using an unprotected mark.

17. Can the licensee register the trademark in its own name?

A. It should be expressly prohibited. A well-drafted licence contains an acknowledgement of the licensor’s title, an undertaking not to register the mark, any similar mark, any domain or any social handle anywhere, and an obligation to assign any registration obtained in breach, supported by an irrevocable power of attorney.

18. What should happen when the licence ends?

A. Immediate cessation of use, a defined sell-off period for existing certified inventory or a buy-back, destruction or delivery up of packaging and promotional material, transfer of domains, social handles, marketplace seller accounts and app listings, removal of signage at the licensee’s cost, cancellation of the registered user entry, return of manuals and confidential information, and survival of confidentiality, indemnity and audit obligations.

19. Can a licensee sub-license the brand?

A. Only if the agreement permits it. Where sub-licensing is allowed, the head licence should require the sub-licence terms to mirror the head licence, require licensor approval of each sub-licensee, and state expressly what happens to sub-licences when the head licence terminates.

20. Are there competition law limits on what I can require of a licensee?

A. Yes. Section 3(5) of the Competition Act, 2002 preserves reasonable conditions necessary to protect intellectual property rights, so ordinary quality, field and territory restrictions are generally acceptable. Tie-ins, exclusive supply obligations, refusal to deal and resale price maintenance are assessed under Section 3(4) on their effects, and abuse of a dominant position under Section 4 is not exempt.

21. What tax applies to brand royalty?

A. Licensing of intellectual property attracts GST as a supply of service. Royalty payments attract withholding under Section 194J for domestic payments and Section 195 for non-residents, with treaty analysis and the associated Form 15CA and 15CB compliance. Stamp duty on the agreement varies by state.

22. We license our house mark between group companies. Is that a tax risk?

A. It requires care. Where a brand is licensed between associated enterprises, the royalty must be at arm’s length, and Indian transfer pricing authorities scrutinise brand royalty closely — both where no royalty is charged and where the rate cannot be supported. Contemporaneous benchmarking and a documented commercial rationale should be prepared at the time the licence is put in place, not afterwards.

23. I am a foreign brand owner licensing into India. What should I do first?

A. Register the mark in India, because a foreign registration confers no rights here. Maintain an Indian address for service, confirm the classes cover what will actually be sold, consider recording the Indian licensee as a registered user so that use in India is clearly evidenced, and structure royalty remittance with the foreign exchange and withholding position addressed in advance.

24. My licensee is producing poor quality goods. What can I do?

A. Enforce the agreement — reject non-conforming goods, require withdrawal, invoke the cure period and, if the failure persists, terminate. If the licensee continues to use the mark after termination, that use is infringement. Where a registered user is recorded, Section 50 also allows the Registrar to vary or cancel the registration where the mark has been used otherwise than in accordance with the agreement.

25. Do I need a licence agreement for my own subsidiary to use my brand?

A. Yes, and it is one of the most commonly neglected documents in Indian group structures. A written licence with quality control ensures the subsidiary’s use counts as use by the proprietor under Section 48(2), records the commercial terms for tax purposes, and prevents the awkward position where the entity actually building the goodwill is not the entity that owns the mark.

26. What does Delhi Legal Company charge for brand licensing work?

A. It depends on whether the engagement is drafting, negotiation, a full franchise documentation set, or a portfolio-wide intra-group licensing structure. We quote in writing, and we begin with a check that the marks being licensed are actually registered, subsisting and cover the goods and territory in question, because that is where the exercise most often needs work before drafting begins.