Please note, when command window is ran from the location of the files UI appears and can complete installation.
What happens when you kill the process? Does the Provisioning Template continue? It looks like setup.exe is waiting for some input but it is running as System and so its not going to give you any UI. With your script ending on Net Use then as long as that finishes successfully it should show up as successful.
When I kill the process tree setup.exe will close down (as you expect) however it will go back to the task, sometimes saying failed, some saying success. I'm not sure whether it will need an answer file as when launching it through cmd locally boots the upgrade?
You are upgrading an existing OS with a software distribution package, not using provisioning template.
If you want to understand what is going wrong you shuold run the task with different credential (you can set another user under the packages options).
If you log on the target machine with the same credentials you can view the UI (maybe is still waiting for a mouse click, but the user "SYSTEM" doesn't have the desktop, so...no UI visible)