I think she was wrong, but I don’t think your response was appropriate. Sometimes you just have to accept that though the other person is not acting properly, they’re not about to change that so you have to give in. I personally would have said once or twice that this is my daughter’s seat and she’s coming right back, but if the woman would have insisted on sitting there, I would have moved somewhere else or put my daughter on my own lap. To put her on this older woman’s lap was somewhat chutzpadik and immature, IMO, despite the fact that she was in the wrong.
Just my .02.