You could always just respond with, I think you look great.
That way, you’re not having to say Oh, no you’re not fat (because that’s playing into the whole “fat is wrong/bad” ideology). You’re just switching the focus.
What’s especially difficult here, is that we know that fat is not an insult, and size is nothing to be ashamed of, but not all people have had or believe that realization yet…
Usually if someone is asking that, they are probably asking if the outfit is flattering or not. Around here, we say fuck flattering, I’ll wear whatever I please, but once again, some folks really want to dress in styles or colors that are “flattering” and shift their appearance slightly… or at least make them feel like their appearance has shifted slightly. And that completely makes sense because that is what we are told to do. That’s hardwired in there for a lot of folks, and difficult to un-learn.
So for those reasons, I would stick with I think you look great, or another compliment specific to something you like about their ensemble.