It was the first time an appeal to the EU's terror list was successful at the EU court.
However, the EU's Council of Ministers, which represents all 27 EU governments, has refused to remove the group from its list.
Legal reply request
Instead, it has asked the group to submit a legal reply to the ruling to state why it should not be on the list.
The ruling had said EU governments failed to give the group a fair hearing.
"The policy of appeasement was aimed to promote moderation in Iran. But it was counterproductive and it led to the rise to power of [Iranian President Mahmoud] Ahmadinejad"
Maryam Rajavi, National Council of Resistance chief
The US also lists the PMOI as a terrorist organisation.
The group, founded by students at Tehran University in the 1960s, insists it advocates the overthrow of Iran's hard-line clerical regime in Tehran by peaceful means.
Maryam Rajavi, head of the Paris-based National Council of Resistance, the PMOI's political wing, said: "We want to protest before the assembled European heads of state so they will be aware of this non-implementation of the ruling of a European court."
"The rule of law in all of Europe is being undermined by the council's decision," Rajavi told cheering supporters.
Rajavi condemned the PMOI ban as an effort to "appease the mullahs' regime in Tehran".
"The policy of appeasement was aimed to promote moderation in Iran. But it was counterproductive and it led to the rise to power of [Iranian President Mahmoud] Ahmadinejad."
Rajavi's organisation enjoys significant support among many middle-class Iranian exiles living in Europe and the US.