This could work both ways - if Image (or Thumbnail) points to a URL, it will load the image from the supplier site. (I believe Ariba will cache the image, but I'm not 100% sure on the details. Perhaps somebody else can help there?) If you give it a filename, you will need to upload the images. If you open a catalog subscription and go to the Import Tool, you should see an option that says Optional Image File. You can use this to upload a .zip file with the images you've referenced in the CIF. If you have an image boxofpaper.jpg in the zip, you just need to put boxofpaper.jpg as the Image in the CIF.
Hope that helps!