A Week i n Retai l &

Consumer
June 18 to 22, 2012
Contents
Executive summary 2
Indian jewellery market 3-5
Tax and regulatory insights 6
1
Executi ve summar y
I ndian jewellery market
The Indian jewellery market is one of the worlds largest.
A traditional part of Indian culture, jewellery has been
associated with wealth and saving. Jewellery-buying is an
important aspect of festivals. Leading jewellery brands
have brand ambassadors to market an aspirational
lifestyle to Indian women, suggesting that buying gems
and jewellery is more than an investment. It is instead
being promoted as rooted in our culture to make a woman
look and feel beautiful. This newsletter presents an
overview of the market and highlights the recent trends
shaping the market.
Tax and regulatory insights
This issue describes the judicial precedent
of the Karnataka High Court in the case of
an Indian company, where it was held that
payment made by the taxpayer to a
foreign company for carrying out airborne
geophysical survey services is not taxable
as fees for technical services (FTS) under
the India-Netherlands tax treaty.
2
I ndi an j ewellery market: Overvi ew
3
The domestic gems and jewellery market of India is estimated to be around INR 1.2 lakh crores and is mostly
dominated by women shoppers. Exports account for another US$ 44 billion of revenue. The sector has a majority of
unorganised players and organised share is only 5%. According to the provisional data by Gems and Jewellery Export
Promotion Council (GJPEC), the total exports of gems and jewellery during April 2011 to March 2012 stood at US$
42.84 billion, including that of cut and polished diamonds at US$ 23.33 billion, gold at US$ 16.52 billion and coloured
gemstones at US$ 342.80 million.*
Sources:
*http://www.ibef.org/artdispview.aspx?art_id=31689&cat_id=439&in=25
**http://www.bullionstreet.com/news/india-creates-six-more-sezs-for-gems--jewellery-sector/1830
Key drivers
Advantage
India
Foreign
direct
investment
(FDI) policy
Indians have traditionally considered the purchase of jewellery as a symbol of savings and wealth.
Rising disposable incomes has led to an increase in domestic consumption.
Increasing penetration of organised players provides variety in terms of products and designs.
These players are also offering financing schemes to consumers to further boost sales.
Government initiatives in the form of special economic zones (SEZs) have also helped. Recently,
the government has announced creating six new SEZ areas for the gems and jewellery industry.**
India has a history of craftsmanship in the jewellery sector and is a storehouse of skilled labour
available cheap.
The country has established manufacturing excellence in jewellery and diamond polishing.
India is among the worlds largest and fastest growing gems and jewellery markets in the world.
100% FDI under automatic route is permitted in value added activities like cutting, polishing,
manufacturing of jewellery and wholesale trading
100% FDI under automatic route is permitted for mining and exploration of diamonds, gold, silver
and precious stones under automatic route, subject to Mines and Minerals (Development &
Regulation) Act, 1957
For retail trading, up to 100% FDI is permitted with Government approval only in single branded
segment, subject to the following conditions:
products to be sold should be of a single brand only
products should be sold under the same brand internationally
products to be branded during manufacture
foreign investor should be the brand owner
for FDI beyond 51% mandatory sourcing of at least 30% of the value of products sold to be done
from Indian small industries/village and cottage industries, artisans and craftsmen
I ndi an j ewellery market: Key trends
4
Sources:
*http://articles.economictimes.indiatimes.com/2011-11-07/news/30369692_1_jewellery-market-jewellery-range-vinod-hayagriv
Click-and-
brick model
New
schemes
Luxury
jewellery
Jewellery is one of the growing sectors in online commerce. E-retailers offer better pricing
options, greater variety, international patterns, third-party lab certification of all their
products and easy payment schemes to gain a larger customer base. However, customers
are still wary of the cut, quality and finishing of jewellery. To cut through this inhibition, e-
retailers are also opening physical showrooms to get consumer confidence.
On the other hand, several organised players have also launched their online portals to
reach out to shoppers who prefer the online medium.
With rising gold costs and a slowing-down of the market, jewellery players are tweaking their
product offering to cater to a larger customer base.
Retailers are introducing lightweight and trendier jewellery, thus serving the dual purpose of
being stylish as well as increasing customer savings.
Indian consumers are traditionally particular about the purity of the gold they buy. Most
consumers prefer gold of 18 carat and above. However, with skyrocketing costs, consumers
are now demanding jewellery with lower purity such as 14 carat.
Retailers are taking strategic moves such as jewellery collections for children. Indians have
always traditionally saved for their children and this concept cashes on this sentiment.
The Indian luxury market is still niche and is estimated to have grown at 20% CAGR through
2011. However, luxury jewellery is not a new concept in India and forms the largest segment
of the luxury market.
The key challenges faced by luxury jewellery makers are finding the right real estate, dealing
with high rental costs, an import duty of upto 30% and loss from counterfeit pieces made by
local jewellers. Initially, luxury stores were confined to luxury hotel galleries and
international airports. However due to a growing clientele, opening luxury malls has become
a viable option.
According to a report by Euromonitor International, India has become the worlds third
largest mens luxury jewellery market with a market size of 194.4 million USD in 2011 and
estimated to grow at nearly 36% in 2012.*Even though the mens market is small as
compared to the composite jewellery market, this growing segment provides an untapped
opportunity.
I ndi an j ewellery market: Key trends
5
Sources:
*http://economictimes.indiatimes.com/markets/commodities/poor-monsoon-may-hit-gold-business/articleshow/14253463.cms
**VCCircle.com, VCEdge.com
Expansion
plans
Growth in
platinum
jewellery
sales
Several organised players are foraying into Tier-II and Tier-III cities. Given the fact that
almost 60 to 70% of gold sales is attributed to rural India, this strategic move will help
retailers increase their customer base.*
In addition, large organised jewellery retailers are tying up with international players and
expanding their operations outside India. India is known for its traditional and intricate
jewellery. Collaboration with international brands will produce a broader product offering
to cater to varying customer demands.
The volatility of the price of gold has boosted the sales of platinum jewellery. Platinum was
earlier considered expensive and only the rich indulged in it. Now, platinum jewellery prices
are comparable to gold, creating a new set of consumers who are increasingly favouring the
white metal. Though women are the key consumers, retailers are increasing their offerings to
cater to the mens jewellery market. According to media reports, the Indian Bullion Market
Association expects the imports of platinum to increase by nearly 50% in the next few years.
Select PE transactions**
Investor Investee Sector % Stake
Amount invested
(US$ million)
Month of
transaction
Tiger Capital CaratLane.com Online jewellery 33.4 6 February 2011
Accel Partners Bluestone Online jewellery NA 5 January 2012
Accel India
Management and
Silicon Valley Bank
Jewels Online Online jewellery NA 5 January 2012
6
The Karnataka High Court (HC) in the case of an Indian
company (taxpayer)
1
held that payment made by the
taxpayer to a foreign company for carrying out airborne
geophysical survey services is not taxable as fees for
technical services (FTS) under the India-Netherlands tax
treaty.
The taxpayer is engaged in the business of prospecting
and mining diamonds and other minerals. The taxpayer
executed an agreement with Fugro Elbocon BV,
Netherlands (Fugro), pursuant to which Fugro conducted
an airborne survey using its specialised equipment to
provide high-quality and high-resolution geophysical
data to the taxpayer. Fugro deputed technical personnel
to conduct the survey. The data collected was provided to
the taxpayer in a particular format.

The tax officer held that the consideration paid by the taxpayer
to Fugro was FTS in terms of Article 12 of the Indian-
Netherlands tax treaty and hence the taxpayer should have
withheld tax from the consideration paid to Fugro. The
Commissioner of Income Tax (Appeals) [CIT(A)] reversed the
order of the tax officer and the Income Tax Appellate Tribunal
upheld the order of the CIT(A).
The taxpayer contended before the HC that Fugro had neither
made available the technical know-how of conducting the
survey nor had developed/ transferred any technical plan or
design to the taxpayer as contemplated under Article 12(5)(b)
of the India-Netherlands tax treaty.
The HC observed that the taxpayer could make use of the data
supplied by Fugro by way of technical services to carry on its
business. However, the taxpayer did not get any enduring
benefits from the aforesaid survey. The HC asserted that Fugro
had not made available the aforesaid technology with the aid of
which the taxpayer would be able to collect the data, which was
earlier passed on by Fugro. The HC also observed that the
contract was for providing services and not for supply of
technical design or plan. Furthermore, the HC noted that the
reports provided by Fugro were only additional mode of
representation of data and Fugro had not devised any technical
plan or design.
Therefore, the HC held that payment made by the taxpayer to
Fugro for carrying out airborne geophysical survey services was
not taxable as FTS under Article 12(5)(b) of the India-
Netherlands tax treaty.
Comments This is an important HC ruling which deals with
the concept of make available. The HC emphasised on the
meaning of make available and stated that technical services
make available the technical knowledge, experience, skill,
know-how or processes only when the person acquiring the
services is enabled to apply technology contained therein
without recourse to the service provider in future.

1 TS-312-HC-2012 (Kar)

Payment made to a foreign company for airborne geophysical survey services is not fees for
technical services
Tax and regulatory i nsi ghts
Contacts
7
Rohit Bhasin

Partner, PwC
Mobile+91 9810191282
Direct+91 0124 330 6016
Emailakash.gupt@in.pwc.com
Akash Gupt

Executive Director, PwC
Mobile+91 9811331613,
Direct+91 0124 330 6001
Emailakash.gupt@in.pwc.com
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