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The kindle doesn't support indents at all. calibre fakes them by wrapping the indented html in blockquote elements. This has various limitations some of which come from the fact of using blockquotes others from bugs in the Kindle MOBI renderer.
If you want to understand what calibre is doing convert the generated MOBI file back to epub with the debug option and look at the debug-raw.html file in the input directory.
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