Fat does displace more volume for its weight than muscle does. It's why overweight people actually are more buoyant in water than muscular, lean ones. It's the basis for determining body fat by immersion in a large water tank (and also why when my fat percentage was less than 10% I would sink like a rock in water).
But fat isn't all concentrated in a big slab, like that photo above. It can be marbled all throughout the muscle tissue, like a fine cut of steak. And that can lead to some false assumptions about the amount of fat we're carrying.
When I taught college phy-ed I would do a body fat analysis on my students at the beginning of each semester, as well as a strength test. And I was astonished to discover that trim-looking young men, some with nice muscle definition and 6-packs, no love handles or anything, actually had fat percentages into the mid-20s, which is far from ideal for that age group. And their strength tested below-par, too.
Their muscles, though still nicely shaped following their growth into adulthood, were in fact riddled with fat. Outward appearances can be deceptive regarding the fat we carry inside us, until it begins to concentrate in obvious places we can observe like the abdomen, which is why I encourage doing a fat analysis. I know the BMI methodology is heavily criticized, but I believe a basic fat analysis remains a useful tool for good health & fitness.