The movie, filmed footage of the slaughter and it claims that dolphin meat is contaminated with toxic mercury.
Taiji, a little fishing village in southwestern Japan, kills only a very small number of dolphins hunted by Japan each year.
The town kills about 2,000 dolphins every year for their meat,
some are captured and sold to aquariums.
But environmentalists have targeted Taiji because it uses a method called "oikomi," in which the dolphins are chased into shore, making the hunt easier.
"They won't stop this hunt because of such pressure," said Hisato Ryono, a local councilman who appears in the film.
The mayor's office released a statement that said Taiji's dolphin hunt is lawful and argued that the movie contained statements that were not based on science.
"There are different food traditions around the world," the statement read. "It is important to respect and understand regional food cultures, which are based on traditions with long histories."
Director Louie Psihoyos said The Cove isn't meant to bash Japan but that it is "a love letter to the Japanese people."
"Our hope is the Japanese people will see this film and decide themselves whether animals should be used for meat and for entertainment," Psihoyos said backstage after receiving his Oscar.
The Japanese government, which allows about 19,000 dolphins to be killed each year, acknowledges that dolphin meat is contaminated with mercury, but denies it's dangerous unless consumed in huge quantities.
Ryono, the local councilman, and Tetsuya Endo, an associate professor at Health Sciences University of Hokkaido, both appear in the current version of the film and say they were interviewed under false pretenses. Both say they have asked the filmmakers to remove footage, and Endo says he hasn't ruled out legal action.
"I feel that they should have declined the award," Endo said.
Psihoyos was unable to get permission to access the cove where the dolphins are killed. Fishermen blocked it with fences. So he and his film team secretly broke into the restricted area which is in a national park — at night to set up cameras that capture the slaughter.
Japanese government officials have defended the fishermen's right to hunt dolphins and called the film unbalanced.
"There are some countries that eat cows, and there are other countries that eat whales or dolphins," said Yutaka fisheries division director at Foreign Ministry. "A film about slaughtering cows or pigs might also be unwelcome to workers in that industry."
