I found the following site which may answer your question:
I remember reading that the confusion may be due to the difference between the knitting industry's definantions of diffent types of knitting and a normal person's.
The industry definations were, basically:
If done on a computerised/electronic knitting machine with no/minimal human intervention/supervison: 'Machine Knit'.
It done on an electric machine or hand operated knitting loom/frame with constant human intervention/supervision: 'Hand Knit'.
If done on knitting needles: 'Hand Knit on Needles' or 'Knit on Needles' (can't remember the exact phrase).
I can't remember if this refered to the EU or not.
So if the garment was made on a hand operated loom it could be that the seller and the lady you spoke to are both correct.