Not illegal, just meaningless. The tolerance applies to the deviation from the true position location of the feature, but there is no location given. While a positional tolerance can have the side effect of controlling straightness, flatness, parallelism, et al, it is in reference to a true position, which requires a datum reference frame and therefore datums. No datums, no tolerance.
Just humor them and say all the parts pass. Eventually someone will either wise up or they will not know the difference. Also add a note to your documents that gives exactly the explanation they gave you and ask they sign it as an proof you know how the inspection should be handled.
Like the old joke - the name is spelled R-x-x-q-y, and pronounced "Smith."