trying to change the color of puffs eyes / skin and now it gives me this alert
Did you figure it out? If not, which part are you confused by? A palette is a table of colors that paletted, a.k.a. indexed images (types _8, _9 and _a/10 in Melee), uses as a reference, rather than storing a color for each individual pixel (which almost always takes a lot more space).
The message says that the palette in the image you're trying to import is too big (meaning it has too many colors). To reduce the number of colors, open it in GIMP or Photoshop and re-generate a new palette for it (re-index), or remove the palette completely by converting it to a RGB or RGBA image. (Just Google how to do that if you don't know how.) If you do the latter method, DTW will generate a new palette for it during the import process. The latter method is probably easier and will probably give you slightly better quality.