Jura is right but there are more circumstances under which this phrase can be used. It doesn't have to be for when you want to take a seat next to someone, in fact I would say its mostly used when you ask for someones attention, i often use it on the phone. If the answer is, not really, it usually means that despite the fact that he is doing something, he is not overly busy and can give you some time. But read the body language! It can tell you more than his words.

It depends on the situation, he could just be polite. If it happens at work, you can say,' Well I'll just move over here'. If he says, 'That's alright, you can sit here', you know that you haven't disturbed him.