The ICC charged Saif al-Islam in June 2012 with crimes against humanity committed during the revolution that toppled his father in 2011.
Libyans rose up against Muammar Gaddafi’s four-decade rule in February 2011 and deposed him in August 2011. He was slain on October 20 of the same year.
The Libyan government had challenged the ICC's right to try Saif al-Islam on the grounds that since Tripoli was planning to put him on trial in a local court, the ICC had no jurisdiction to start its own proceedings, because The Hague-based court only intervenes if the local justice system is not functioning.
On Thursday, the ICC judges rejected Libya’s request to halt the prosecution of Saif al-Islam for the alleged crimes.
"The Appeals Chamber... rejected the Libyan authorities' request to suspend the surrender...," the judges said in a statement.
The judges at The Hague added that Libya remained "obliged" to hand over Saif al-Islam.
Since November 2011, the 40-year-old, who served as Gaddafi’s de facto prime minister, has been in the custody of a local militia in the western mountain city of Zintan where the writ of the central government runs weakly.
Saif al-Islam’s ICC-appointed lawyer John Jones on Thursday called on the Libyan government to hand him over to the ICC.
"The ICC has spoken today, clearly and categorically, regarding Libya's duty to immediately surrender Mr. (Saif al-Islam) Gaddafi to the ICC's custody," Jones said in a statement.
"The defense calls on the members of the United Nations and the international community to make it clear to Libya that its defiance of the ICC's order for the delivery of Mr. Gaddafi to The Hague will not be tolerated."
However, Libya’s representative to the ICC, Ahmed Jehani, said the government "will again appeal the ICC decision as soon as Saif al-Islam is transferred" to Tripoli.
"The ICC decision is based on Saif al-Islam's detention in Zintan and not under the control of the judicial authorities in Tripoli," he added.
"This (ICC) decision is not final. Libya's right to try Saif al-Islam is linked to his transfer to Tripoli," Jehani stated.
SHI/SHI