The Set File Icon action sets the icon of the specified file.
You can set the icon from a specific image, from a clipboard, from an image in a file, or from a screen capture area.
Click the File Chooser button to the right of the action to select an existing file on disk. Option-click on the File Chooser button to show the currently selected file in the Finder (assuming it exists already).
Note that the action can only set the icon of the file if the current user has permission to set it - in particular applications from the Mac App Store typically require authenticated permission to change the icon and so this action cannot affect such files.