The Supreme Court ruled 7-2 in the City of New York's favour. Justice Clarence Thomas, giving the opinion of the court, noted that under New York law, property owned by a foreign government is exempt from taxation

if it is "used exclusively" for diplomatic offices or for the quarters of a diplomat "with the rank of ambassador or minister plenipotentiary" to the United Nations.

The PMI building is owned by the government of India. Several floors are used for diplomatic offices, but approximately 20 floors contain residential units for diplomatic employees of the mission and their families. The employees — all of whom are below the rank of Head of Mission or Ambassador — are Indian citizens who receive housing from the mission rent free, the Supreme Court noted.

In April, India and Mongolia filed a joint reply in the case saying, "housing Mission staff on Mission premises because the foreign sovereign has determined that their presence is required to perform their diplomatic and governmental duties does not involve any entry of the foreign sovereign into any marketplace. Rather, the activity at issue in the instant cases is entirely between the Governments of India and Mongolia and their own diplomatic staffs, whose employment relationship is governed wholly by the laws of those two nations."

For several years, the City of New York has levied property taxes against India and Mongolia for the portions of their buildings used to house lower level employees, Justice Thomas noted, adding, the two governments refused to pay the taxes.

By operation of New York law, the unpaid taxes eventually converted into tax liens held by the city against the two properties. The Mongolian ministry owed about $2.1 million in 2003, which has since grown to $4.1 million.

The Bush administration backed India and Mongolia, saying the city's lawsuits have invited retaliation by foreign countries against U.S. property overseas.

New York Mayor Michael R. Bloomberg said the Supreme Court's decision to allow U.S. courts to hear disputes between his city and foreign governments "brings us closer to finally ensuring that countries with missions and consulates in New York pay their fair share in city taxes, just as all New Yorkers do."

On April 2, 2003, the City of New York filed complaints in a state court seeking judgement to establish the validity of the tax liens. Justices John Paul Stevens and Stephen Breyer, giving the dissenting opinion yesterday, said, "This case is not about the validity of the city's title to immovable property, or even the validity of its automatic pre-judgement lien.

Rather, it is a dispute over a foreign sovereign's tax liability. If Congress had intended the statute to waive sovereign immunity in tax litigation, I think it would have said so."

The Permanent Mission of India in New York did not return a call from the Tribune for comment.

Under the Foreign Sovereign Immunities Act, the jurisdiction of U.S. courts generally does not extend to foreign governments. But the Supreme Court cited the exception when "rights in immovable property" are at issue. This, the court said, applied in the New York case.