“In Files App” location is for editing in-place mode, in other words, you edit external files from locations like Dropbox, Box, Google Drive, One Drive, iCloud Drive, etc. However, if you want to import and edit locally a copy of a file from iCloud Drive, go to the “On my iPad” location then tap the “+” and choose one of the “Copy from Files/iCloud Drive” options.
Editing in-place documents means that you can use other apps on your device to modify the files stored within Notes Writer without duplicating them first, as long as the other app supports in-place editing as well (if it doesn’t, it gets a copy of the file just like before).
Please, make sure that you install the official Dropbox, One Drive, Box, etc. apps on your device and add them as file providers to the "Files" iOS app to allow the access to your cloud documents in the "In Files app" location.