India has been arguing that tax cannot be levied as the diplomatic staff, which occupies the 20 floors of building in midtown Manhattan across the United Nations headquarters, is exempt from tax.
But, US district court Judge Jed S. Rakoff ruled on Monday that under Vienna conventions, only the residence of head of the mission is exempted from tax.
"We could go up to the Supreme Court," if necessary, Indian official sources said on condition of anonymity.
New York city court had sued India and other mission in 2003, but the US Supreme Court last year rejected their claim that the local courts lacked jurisdiction to hear the case as diplomatic immunity protected them from the lawsuit.
The sources, however, said said that the Supreme Court judgment was only technical one. It was not on whether city has the right to collect taxes on the building as some reports have suggested but purely on the jurisdictional issue.
They said India plans to pursue the issue on two-tracks -- bilaterally and legally. "Now we will start discussing substantive issues."
Though they declined to elaborate on the "bilateral" track, it apparently implies that India would hold talks with the United States on resolving the issue.
The US State Department had earlier opposed the move, fearing that the country would have to pay millions of dollars for the properties it had in other countries.