I don't think either side is "right" with regard to who gets to make these decisions. I'm not 100% sure that either side is "wrong," either.

The DM is the arbiter of the rules and the game world. However, the DM has this authority by the agreement of the players. Ultimately, everybody at the table - DM and players - is there so that everybody can have fun. No one person, DM or not, should make things less fun for everybody else, and a DM on a power trip will soon find himself without a group.

On the other hand, the players have agreed to put the DM in the position of being the final arbiter of the rules, and part of that is accepting that the rules don't always work in their favor. If players won't accept a rules (or setting) decision that disadvantages them, they'll soon find themselves without a DM.

So I guess my answer is that neither side has the right to make a final decision, and that both sides have an obligation to consider the other side's position and be open to compromise.