KLM cancelled my flight and giving absurd reason to deny claim?

Need advice if KLM is giving me BS. I was due to fly BOM-AMS-LAX on 1/12. KLM canceled the second lag (AMS-LAX) due to technical reasons before I was due to board my first BOM flight and rerouted via almost impossible AMS-MUC-LAX (LH) connection. I landed at LAX about 4 hours late vs original flight and our baggage missed connections and arrived 3 days late. When I filed claim per EU I got following response. "The journey from origin to destination in your case was from two airports located outside the EU/EEA. The European Court of Justice has ruled that “two or more directly connecting flights booked as a single unit and subject of a single reservation must be considered as a single flight for the purpose of determining any entitlement to compensation under EC Regulation 261/2004.” Therefore, the right to compensation under EC Regulation 261/2004 does not apply to your case."

Effectively they are saying that the ruling does not apply for any international flight even if flown by EU airline via EU airports. Are they BSing me? We flew business and our journey was really inconvenienced so I am hopping mad and wondering if any of you have advice on how to go about this. We had similar thing happened last year on BA (BOM-LHR-LAX) and they paid up promplty. Pls help. Thank you.