As the mergefield is in the merge document, I don't see that the data source is relevant to whether you can use a conditional field to determine whether to insert a picture based on the value in that mergefield, nor why you cannot use an IncludePicture field as that is the way to insert images.
Graphics merges require a particular syntax - see
https://www.gmayor.com/mail_merge_graphics.htm and
https://www.gmayor.com/mail_merge_graphics_addin.htm