My understanding of the rule is that the time out request should have been rejected

Pages 52/53 of the rules

http://assets.teamusa.org.../2312/Indoor_Rules_09.pdf

15.11 IMPROPER REQUESTS
15.11.1 It is improper to request an interruption:
15.11.1.1 during a rally or at the moment of, or after the whistle to serve,
15.11.1.2 by a non-authorized team member,
15.11.1.3 for player substitution before the set has been resumed from a previous substitution by the same team,
15.11.1.4 after having exhausted the authorized number of time-outs and player substitutions.
15.11.2 The first improper request in the match that does not affect or delay the set shall be rejected without any other consequences.
USAV 15.11.2: If a change in request is due to a
referee's mind change, the request will be honored
and no sanction assessed.
15.11.3 A repeated improper request in the match constitutes a delay.
USAV 15.11: A request for first or second time-out may be
honored immediately subsequent to an improper request
for substitution because of wrong player or excess team substitution.
A proper request for substitution may be honored
immediately subsequent to an improper request for time-out.
Page 52

16. SET DELAYS
16.1 TYPES OF DELAYS
An improper action of a team that defers resumption of the set is a delay and includes, among others:
16.1.1 delaying a substitution,
16.1.2 prolonging other interruptions, after having been instructed to resume the set,
16.1.3 requesting an illegal substitution,
16.1.4 repeating an improper request,
16.1.5 delaying the set by a team member.
USAV 16.1: A request for an illegal substitution or excess
time-out shall result in an improper request. However, if such
a request is acknowledged (i.e., whistled), a delay sanction shall
result. Any substitution request that is improper or causes
a delay is denied. No additional request for substitution from
that team may be made until the next interval when the ball is
out of play.
16.2 DELAY SANCTIONS
16.2.1 "Delay warning" and "delay penalty" are team sanctions.
16.2.1.1 Delay sanctions remain in force for the entire match.
16.2.1.2 All delay sanctions are recorded on the scoresheet.
16.2.2 The first delay in the match by a team member is sanctioned with a "DELAY WARNING."
16.2.3 The second and subsequent delays of any type by any member of the same team in the same match constitute a fault and are sanctioned with a "DELAY PENALTY": loss of rally.
16.2.4 Delay sanctions imposed before or between sets are applied in the following set.

Page 53

My post above was under the impression that the up ref had already signaled for service