I wouldn't because I think it is safer for the child to sit on a seat and I would probably stand myself, but if it were me, I would have told her to bugger off and come back when she can ask in a nicer tone than what she did. There is no need for rudeness and I think it is just dumb to expect that a child should be made to give up their seat just because the rules state they do not have to pay a fare. And if she wasn't elderly, pg or disabled I would have said no anyway, even if she did ask nicely.