Is "I saw this being used by you" (odd sentence) the correct way of phrasing this? The word in question is being which I don't know why it is correct. I asked a very similar question some time ago but the answer referred to the other meanings of the verb "see" as its explanation whereas it got its main meaning here. Of course I could avoid the passive altogether and definitely should here (I saw you use...) but I want to know regardless.
This is the correct way to say it, if you really want to use "being" in the sentence. As you mentioned, the better way to say this is this:
I saw you using this.
But if you're set on using the passive "being", then yes, this is correct! It isn't used super often, but it's understood by anyone who hears it.