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it is a retired Black Market item that allowed a player to customise a horse's base coat. Adding markings, patterns, even changing the entire coat to a different colour. They were removed from the game in 2012/2013 because the process did not work well with certain browsers and that, of course, was not fair on the players that had bought the item with passes and then couldn't use it. Diamond Apple coated horses are very rare nowadays and very very rarely found in the sales and if they are it is for a lot of currency (usually passes).
By the way, the coat that the Diamond Apple coat horse was given at the time the item was put on the horse, is not changeable.