Let me see if I can explain a little about WordPress.
WordPress, the themes and plugins are programs written in PHP that dynamically generate web pages when you request them. So when you type 'mydomain.com' WordPress goes out to the database and reads the information that is there and sees that you are using the Atahualpa theme, so it transfers control to the program 'index.php' that is in the Atahualpa folder.
This program reads the database to get the styling it needs for the page (colors, fonts images etc) then it starts to build the HTML that will make up the page you will view. After building the <head>...</head> it calls a WordPress function (several in fact) to get the posts that are stored in the database. They get formated with the right HTML and then the footer is created and finally WordPress sends this DYNAMICALLY created web page to your browser.
Once you click off the page, the HTML that made up that page NO LONGER EXISTS.
A theme has source code, the code that will build the HTML page.
So when you set the CSS to be external, it is just an option in the database that will be used at runtime
You might want to spend a little time reading the beginner documentation about WordPress