Basically the candidate would state something that was pretty obvious at some point in the interview and then the interviewer would say that he was wrong. The idea here was obviously to see whether the candidate had "the balls" to confront someone who basically has more authority here and tell him that he, in fact, was the one who was incorrect. From what I remember the reasoning was that in real life, you're often in a position where you have to convince someone higher up than you that they're incorrect and here is why.
I just tried googling for the story for a few minutes but couldn't find it :(
I think part of the reason why being argumentative has a negative vibe in the general public is because people don't really argue - they just bring their point of view and try to shove it down your throat until you swallow it and agree or choke on it. The mere thought of considering new suggestions is for many people scary.
There's a big difference between a disagreement and an argument.
I understand the concern over appearing "condescending, argumentative, or otherwise unpleasant" but sometimes you need to do that. In fact, if I were hiring I'd find such characteristics totally appropriate and valuable, to a certain degree.
I say, sure, be polite but when you are taken to that limit, feel free to condescend, get argumentative and express yourself.