In that context in British English it means 'oh you shouldn't have!' (Treated me to a meal)...'you're so cheeky!' It's common to (playfully) pretend to turn down someone paying the whole tab & then accept the other person's treat.

Sue means that John is doing something she thinks he shouldn't be / isn't meant to / doesn't need to. It's a colloquial way to thank you and that their action is unnecessary.