New York: The Indian mission in New York will not have to pay taxes worth USD 42.5 million on its property here, with the US Supreme Court upholding a Federal Appeals Court decision to exempt taxes on property owned by foreign governments.

In 2010, 2nd US Circuit Court of Appeals in Manhattan upheld the State Department intervention in 2009, which exempts taxes on property owned by foreign governments and UN missions that housed diplomatic staff.

In 2008, a Federal District Judge had ruled that India, which owns a 26-story property near the United Nations owed USD 42.5 million and Mongolia owed USD 4.4 million.

"It doesn't matter what is fair or not fair," Aaron Stiefel, the Indian mission's lawyer, told a news agency, after the Supreme Court denied New York City government's petition on Monday.

Stiefel underlined that the rule of reciprocity applied to the case since US diplomatic buildings in India were not taxed.

"While there is perhaps some unfairness to the City when the federal government retroactively declares property taxes imposed by the City against foreign countries to be null and void, this unfairness inheres in the federal government's unquestioned supremacy in the management of foreign relations," the judges wrote in the judgment.

The State Department had argued that if foreign properties in the US were taxed, then the US would have to pay millions of dollars on taxes for its own diplomatic buildings in many countries.

Stiefel said the ruling would have a "financial impact" on the city since more diplomatic buildings in the future would also be exempt from paying tax.

Meanwhile, New York City government has slammed the Supreme Court decision.

Michael Cardozo, counsel for New York City, said that the Supreme Court decision will cost the city millions in tax.

"We believe that the State Department overstepped its authority in pre-empting the City's ability to collect property taxes on staff housing owned by foreign nations," Cardozo said in a statement.

"In addition to wiping out the City's USD 50-million judgments against India and Mongolia for unpaid taxes and interest, the State Department has erased the debt – worth hundreds of millions of dollars – several countries owe the City," he added.

Commissioner Marjorie B Tiven of the New York City Commission for the United Nations said that NYC was honored to host the diplomats.

"However, this position unfairly increases the burden to taxpayers of the host city," Tiven said.

"Foreign governments avail themselves of City services and should pay their fair share."

In 2003, the city filed suit that India owed USD 16.4 million in taxes. The city was only willing to exempt bottom six floors and basement the Indian mission because they were used for diplomatic work. India argued that tax exemption applied to the entire 26 floor property including residences.

In 2008, U.S. District Judge Jed S Rakoff ruled in favor of the city following which the State Department intervened in 2009.