New York, Aug 18 (IANS) India has won a seven-year legal battle with New York City with a federal appeals court ruling that nations with diplomatic housing do not have to pay city property taxes.

The unanimous ruling by the federal Second Circuit Court of Appeals in Manhattan Tuesday lets India off the hook for $42.5 million in back taxes and interest, and Mongolia for another $4.3 million on their missions to the United Nations.

The three-judge panel ruled a controversial June 2009 decision by the State Department to exempt diplomatic staff residences from $7 million a year in property taxes also applied retroactively to the past-due bills.

The Foreign Missions Act allows the State Department to issue tax exemptions that pre-empt state and municipal tax laws, the court said.

"While there is perhaps some unfairness to the city...this unfairness inheres in the federal government's unquestioned supremacy in the management of foreign relations," it said.

"Certainly, we're thrilled with the result," said Aaron Stiefel, a lawyer who represented India and Mongolia in the litigation. "It's a complete victory," he said. "We got everything we wanted."

India and Mongolia were among several nations that were collectively billed a total of $260 million in taxes on property they own in New York. The appeals decision nullifies a lower court's finding in 2008 that India owed $42.5 million in taxes related to a 26-story tower in Manhattan near the United Nations with 20 floors of apartments occupied by diplomatic employees.

Mongolia was ordered to pay $4.3 million for a six-story building with two floors of staff residences while the Philippines was told to pay $10.9 million for a building on a prime stretch of Fifth Avenue that includes commercial tenants.

Turkey had settled with the city for $6 million while the Philippines had agreed in a settlement to pay $9 million in property taxes and interest. It was unclear what effect, if any, the appeals ruling might have on the settlements.

The city filed suit in 2003 seeking $16.4 million from India and $2.1 million from Mongolia for what it claims are unpaid real estate taxes on residential space.

New York City Mayor Michael Bloomberg blasted the State Department last year after it quietly reversed a 136-year-old policy of requiring foreign governments to pay taxes on housing for UN and consular staffers. Officials said the rule was changed because other countries don't impose apply similar taxes on US properties overseas and the issue was becoming a "diplomatic irritant."

City Corporation Counsel Michael Cardozo said the city would take the case to the US Supreme Court.

"We are extremely disappointed that the court has upheld the State Department's extraordinary exercise of power to nullify New York City's right, as previously upheld by the courts, to impose New York City real estate taxes on foreign missions," Cardozo said.

"This provides a free ride for foreign countries owning certain properties in New York City while unnecessarily burdening local taxpayers. We have prevailed in the US Supreme Court previously on related issues, and again plan to seek review of this decision in that Court."

The Supreme Court had ruled in 2007 that the city could sue countries to try to collect taxes on their properties.


       
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