Trademark Licensing and Royalty Structures in India

A Delhi apparel label licensed its mark to a Surat manufacturer in 2022: ₹15 lakh a year, five-year term, no quality clause. By 2025 the market was full of inconsistent product carrying the label’s name, and the brand’s own distributors were quietly asking whether the company had been sold.

Licensing is the fastest way to earn from a trademark without building factories. It is also the fastest way to damage one. The difference sits in three decisions: the type of licence, the royalty structure, and whether the quality control clause is real.

This guide walks through each decision, how the Trade Marks Act 1999 treats licensed use, and the tax paperwork founders forget until March.

What a trademark licence actually grants

A licence is permission, not ownership. You remain the registered proprietor; the licensee gets a defined, revocable right to use the mark. Everything after that is scope, and scope is where money is made or lost:

• Goods and classes. Licence the mark for specific goods or services, not “the brand” at large. A licence for Class 25 apparel should not silently cover Class 18 bags.
• Territory. India, a region, or specific states. Exports under the mark need their own line.
• Channels. Offline retail, marketplaces, quick commerce, D2C — each can be granted or withheld separately.
• Term. A fixed term with renewal conditions beats an evergreen licence. You want scheduled renegotiation points as the brand grows.
• Sub-licensing. Prohibited unless you say otherwise, and you usually should not.

A properly scoped trademark licensing agreement reads less like a permission slip and more like a map of who may do what, where, until when.

Exclusive, sole, or non-exclusive: choose deliberately

Three structures, three price points:

• Exclusive. Only the licensee may use the mark within the scope — even you are shut out. This commands the highest royalty and demands the strongest performance obligations, because your brand’s fate in that scope now rides on one partner.
• Sole. The licensee is the only licensee, but you keep using the mark yourself. A common middle path for founders who license manufacturing while running their own D2C channel.
• Non-exclusive. You may license others in parallel. Lowest royalty, highest flexibility, and the default if the agreement is silent on the point — which it never should be.

Match the structure to your growth plan, not to the licensee’s ask. An exclusive all-India, all-channel licence signed in year two can block your own expansion in year four.

Exclusivity is the product. Price it like one.

Fixed fee vs revenue share: royalty structures that work

Indian trademark licences typically use one of five payment structures, or a hybrid:

• Lump-sum fee. One payment for the whole term. Simple, clean, and almost always underpriced if the licensee performs well. Suits short terms and narrow scopes.
• Fixed periodic fee. A flat annual or quarterly amount, like the Delhi label’s ₹15 lakh. Predictable for both sides, but disconnected from performance in either direction.
• Per-unit royalty. A fixed rupee amount per piece manufactured or sold. Works well in manufacturing licences where units are easy to count and audit.
• Revenue share. A percentage of net sales. This aligns incentives best, but only if “net sales” is defined to the last deduction and you have audit rights with teeth.
• Minimum guarantee plus share. The workhorse of Indian brand licensing: a non-refundable annual minimum, adjusted against a percentage of sales. The floor protects you in bad years; the percentage pays you in good ones.

The selection rule is verifiability. If you cannot realistically audit the licensee’s sales — separate books, honest MIS, inspection rights — do not price the deal on their sales. Take a fixed fee or per-unit structure instead.

A royalty you cannot audit is a donation.

Quality control: the clause that keeps your licence legal

A trademark exists to tell customers that goods come from one consistent source. When a proprietor licenses the mark but exercises no supervision over what the licensee sells, the mark stops performing that function. This is “naked licensing”, and it hands ammunition to anyone who later attacks your registration or argues your mark has lost its distinctiveness.

Real control looks like this: written product specifications, pre-production sample approval, the right to inspect facilities and stock, approval rights over packaging and advertising that carries the mark, and a defined complaint-escalation route. Breach of standards should carry a cure period and then termination.

Exercise the control and document it. Approval emails, inspection notes and rejected-sample records are the evidence that your mark still means one source, no matter who manufactures.

Record the licensee as a registered user

Sections 48 and 49 of the Act allow the licensee to be recorded as a registered user, via a joint application on Form TM-U with details of the licence and your quality control. The recordal makes the licensee’s use count as your use, which shields the registration from non-use removal, and it puts the arrangement on the public register where diligence teams and courts can see it.

Two pieces of housekeeping ride along. First, the licence term should sit comfortably inside your registration’s 10-year cycle — check your trademark renewal dates before signing a licence that outlives the certificate. Second, cancel the registered user entry when the licence ends.

Tax withholding and paperwork basics

Royalty income is taxable, and the paperwork starts with the payer, not you. Four things to settle before the first invoice:

• TDS. Royalty payments to a resident licensor attract tax deduction at source under the Income-tax Act; payments to a non-resident bring withholding under Section 195, read with any applicable tax treaty. Rates change and depend on status, so fix the mechanics with a chartered accountant, and decide in the agreement whether royalties are gross or net of withholding.
• GST. Temporarily permitting the use of a trademark is treated as a supply of services, so the licensor generally charges GST on royalties. Build the tax line into the invoice format from day one.
• Stamp duty. Licence agreements attract stamp duty that varies by state. An unstamped agreement creates avoidable trouble when you need to rely on it in court or before an authority.
• Writing. Everything above assumes a signed, dated, stamped agreement. Oral licences exist in Indian family businesses everywhere, and they are unprovable exactly when it matters.

Exit, renewal, and keeping the register clean

Write the endings first. Termination triggers should include non-payment, quality breach beyond the cure period, insolvency and change of control of the licensee. Give yourself a short post-termination sell-off window for existing stock if commercially necessary, with quality obligations intact, and a hard de-branding deadline after it.

Keep the distinction between licensing and selling sharp in your head: a licence rents the mark out and comes back; an assignment transfers the trademark permanently. Never let renewal-by-conduct blur a five-year licence into something a court might read as broader. And treat the licence as one document in a larger system — supply, distribution and NDA terms belong in properly drafted IP contracts, not in WhatsApp threads.

Finally, before signing anything, confirm your own foundation: the mark is registered in the licensed classes, renewals are current, and the proprietor on the register is the entity signing as licensor. If the foundation has gaps, register the trademark properly first; licences amplify whatever they are built on.

Licensing rents your mark out. Quality control is the security deposit.

Structure the licence type deliberately, price it on numbers you can verify, supervise what carries your name, and record what the law lets you record. A good licence earns royalties; a well-run one returns your brand stronger than it left.