The special NIA court in February had dropped the charge under section 20 of the Unlawful Activities Prevention Act ('being member of terrorist organisation') against Areeb Majeed.
Police had arrested Majeed, resident of Kalyan in neighbouring Thane district, upon his return from Syria. He was accused of travelling to Iraq and fighting for the ISIS.
The NIA filed appeal against the lower court's order.
A division bench of justices Ranjit More and S S Jadhav today dismissed the agency's appeal, said advocate Mubin Solkar, Majeed's lawyer.
The NIA court has framed charges against Majeed under sections 16 (terrorist act) and 18 (conspiracy) of UAPA, and section 125 of the Indian Penal Code (waging war against a friendly Asiatic power).
Majeed returned to Mumbai on November 28, 2014, following which he was detained and later arrested.
Police lodged a case under UAPA and section 125 of IPC against him and three others, all engineering students.
The four youths had flown to Baghdad in 2014 as part of a group of 22 pilgrims, and upon returning to India, others in the group told the police that Majeed, Fahad, Aman and Shaheen Tanki left them to head for Fallujah, a city in Iraq which was under ISIS' control.
While Majeed later returned, other three have been declared absconding.
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