The Tibetan spiritual leader received the honour from head of the Milan city council, Lamberto Bertolè, ahead of a talk arranged by Milan's Bicocca University at the Arcimboldi theatre.
Loud applause resounded and Tibetan flags were waved as the Dalai Lama recieved the honour.
"Now I'd like to know what my rights and duties are, although I prefer rights," the spiritual leader joked.
The honour has been strongly contested by the Chinese government.
"Our position is clear. We are strongly against any contact or meetings with officials of other countries," Foreign Ministry Spokesperson, Hua Chunying stated in a press conference.
In an interview with La Repubblica, the Dalai Lama explained that the situation in Tibet "remains extremely grim and repressive, characterised by constant controls of Tibetans, who are denied many basic human rights".
The Chinese government's anger was reflected by a group of protesters from Milan's Chinese community who gathered outside the theatre during the ceremony.
There were moments of tension between the Chinese protesters and a group of Tibetan protesters shouting "Free Tibet", but a clash between the two was avoided.
Bicocca University Dean Cristina Messa made an announcement from the Arcimboldi stage, in hope of reducing the tension.
"This meeting does not intend to offend anyone," Dean Messa said.
The Dalai Lama was addressed during an earlier meeting by Milan's Archbishop, Angelo Scola.
"Your presence, Holiness, is an encouragement to proceed even more swiftly along the path of dialogue," Archbishop Scola said.
The Dalai Lama responded: "There are those who appropriate religion to carry on conflicts, but practising religion is practising tolerance, love and compassion".
With ANSA
