The speaker is congratulating the other person on how they spoke to someone who had done or said something offensive. A: He tried to tell me what to do, so I told him to mind his own business. B: That's telling him!

It's not necessarily just when someone says something stupid or offensive. It's anytime you stand up for yourself and be assertive. "My boss asked me to work Sunday but I told him I had family obligations." "That's telling him." It is true that the most appropriate use is for situations with a good bit of conflict.

Thanks a lot!

It's as Jonathan said. If someone says something stupid and someone corrects them, you could say, "that told them." It's the same usage as the previous example. 'that told them' = 'that put them right' (corrected them) or 'that put them in their place' (again, a kind of correction)