The macro definition is found in $:/core/macros/CSS. (If you're American and don't appreciate the spelling colour, notice there is a color macro too that just calls colour!). The macro transcludes the tiddler named in $:/palette with this bit:

<$transclude tiddler={{$:/palette}} index="$name$">

$:/palette is a configuration tiddler managed by TiddlyWiki that contains the name of whichever palette you've currently selected in the control panel. If you then open up the palette named therein (e.g., $:/palettes/GruvboxDark), you'll see a data tiddler listing the names of colors and their CSS values (or, sometimes, another call to the <<colour>> macro).

In the macro definition, you might wonder what's with all the other $transclude widgets:

<$transclude tiddler={{$:/palette}} index="$name$">
  <$transclude tiddler="$:/palettes/Vanilla" index="$name$">
    <$transclude tiddler="$:/config/DefaultColourMappings/$name$"/>
  </$transclude>
</$transclude>

In case the $transclude widget is not able to transclude the tiddler for some reason (e.g., it doesn't exist), then the contents of the widget are used as a fallback (more on this in Hiding and Showing Things). So if the palette isn't set, then the Vanilla palette is used, and if that's gone as well for some reason, a set of default mappings are used.