I think what it is essentially is doing is "sharpening" the sound, let me explain cause I know that sounds ridiculous.
Have you ever taken a photo and had a tone of noise/blur in the photo? A low sample rate/bit rate is comparable to this. Often times there is software which take an educated guess as to what should be placed in the blurry areas. These tools are often referred to as "noise reduction" or "sharpening"
My guess (and this is just a hypothesis) is that the DAC uses a smart software which helps refine the sound. While it will never reach the potential of actual 32-bit audio, it will be better then say its 16-bit self.
Another analogy would be with Blu-ray players. If you put a non-Blue-ray DVD into a Blu-ray player the image is slightly enhanced (more so then a standard DVD player of course). I think this could also be true for this DAC.
I can personally confirm that lower bit songs (meaning from iTunes) do sound more refined than off a "normal" audio device.
*personal not this improvement I hear could be a placebo affect, however I do genuinely feel it is more refined and clear to my ears.*
So yes it could all be a bunch of BS, but other devices use a form of "up-sampling" so it is logical to think it could also occur in audio.
Cheers!