When referring to a kilt as being "hand sewn" I always take that to mean that all visibile stitching is done by hand. This means all the pleats, for the most part.

For instance, on my kilts, the only thing that I might use a machine for would be long, straight, hidden stitches, such as the join in the fabric, which is always hidden in a pleat, or when I stitch the top of the lining, which I then hide beneath a waist band (which I hand sew on).

But the most important element is the pleats. I have noticed here lately that some of the kilts I've been seeing from the larger kilt making firms in Scotland are using more machine stitching even in their hand sewn kilts -- for example, I've noticed more and more buckles being machine stitched on, and this used to be always done by hand. This would be an example of a visible stitch done by machine, but the kilts are still called "hand sewn" because all the pleats are sewn by hand.

As has already been pointed out, the advantage to hand sewing, especially in the pleats, is that you can make the stitching virtually invisible. It's also easier to control the tension and make sure the tartan pattern is perfectly lined up in the pleats.