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How is the software going to know which sound suppose to come from if there are no information about the location of each instrument within the file?
Out Of Your Head simply recreates the speaker listening experience. So with two channel audio, you hear the audio as if it were being played on two speakers in a room. With 5.1 or 7.1 audio, you hear the audio as if you were sitting in a room with 8 speakers arranged in a 7.1 surround configuration.
It sounds just like real speakers and what you would hear from real speakers with that particular recording.
The locations of specific sounds or instruments, etc. is dependent on the recording and recording engineer. Out Of Your Head is not creating or trying to extract any additional information from the recording. It's simply playing the recording through virtual speakers.
So, to answer your question directly, Out Of Your Head plays the sound from the speakers that are assigned to each channel in the source media/recording.
I hope that makes sense.