Sorry about that. The explanation for that behavior is kinda complex, so I would recommend you hop over to [link] and download the trial version of CandyBar. Then you can just go file>import icons, select the icon, and drag your folder on to it to apply it.
If you don't want to download CandyBar, and are willing to do a little messing around, you can find a .app file that already has an icon, go show package contents on that application, look through the resources folder until you find the program's icon, back up the original icon, replace the program's icon with the Applications icon, then go get info on the application, and then copy and paste, and then go back to your app and use your backup to restore the original icon.
Had the same problem and solved it without CandyBar. This was not the first time I had that FUCKING problem D,: Take any .png check this out: [link] than upload the icon BUT don't choose .icns. Choose .hqx. Since I do so it always works
The icon is gorgeous! However, when I try to set it as the Applications folder icon, it doesn't work. I'm opening the info window (Command+I) and dragging and dropping the icon to it. Am I doing something wrong?