The Si Long Imperial Palace was located on top of a hill, the place with the highest elevation in the empire.
The meaning of the location was probably to show the dragon's authority in the empire. Dragons were the rulers, and humans had to respect and worship them if they wanted to live with prosperity in the empire.
It felt like a place where humans were on land, while dragons were close to the sky because they were the most powerful beings in the empire. The location might also be good if the dragons wanted to observe their people from above.
It was true that dragons could transform into their true forms apart from their human form, and it was also true that dragons could also fly if they wanted to monitor their people in the empire, but appearing in their true form would probably only be intimidating innocent humans, so they rarely used their powers to transform into that form.
