The ruling, thought to be the first successful appeal of a detainee's designation as an enemy combatant, ordered the government to release, transfer or hold a new military tribunal hearing for Parhat.
Parhat, a member of China's Muslim Uighur minority, claimed to have fled China in 2001 to an Uighur camp in Afghanistan. The camp was destroyed during US air strikes against the Taliban in October 2001, and he fled again to Pakistan.
It was there that Parhat was handed over to US authorities and in June 2002 was transferred to Guantanamo, where he remains.
A military tribunal assessed Parhat's status in 2004 and, while finding he had not engaged in hostilities against the United States or its allies, ruled he was an enemy combatant because he had lived at the Afghan camp.
The camp was run by the leader of an Uighur independence group, known as the East Turkistan Islamic Movement (ETIM), which was allegedly "associated" with the Taliban and Al Qaeda, court documents show.
The main evidence against Parhat consisted of four government intelligence documents which described activities and relationships that had "reportedly" occurred, were "said to" or "suspected" of having taken place. The court said these assertions could not be verified.
The 39-page opinion also noted the government had suggested that "several of the assertions in the intelligence documents are reliable because they are made in at least three different documents."
It cited Lewis Carroll's "The Hunting of the Snark," where a character absurdly declares: "I have said it thrice: what I tell you three times is true," and said it had no reason to suggest the documents were not all based on the same source.
The opinion also noted that Parhat had made a "credible argument that ... the common source is the Chinese government, which may be less than objective with respect to the Uighurs," who allege oppression by Beijing.
In addition, the court rejected the government's assertion that statements made in the documents "are reliable because the State and Defense Departments would not have put them in intelligence documents were that not the case."
"This comes perilously close to suggesting that whatever the government says must be treated as true," the panel said, which would negate any need for a military tribunal or judicial review of tribunal decisions.
The Justice Department was quoted by the Washington Post as saying that "we are evaluating our options" following the ruling.
