Dharamsala is a village in Northern India which has been, since the early 1960s, the capital-in-exile for Tibetan refugees fleeing persecution in Chinese-occupied Tibet, and yes, the Dalai Lama lives there, and is the 'highest Lama' referred to in the song. He is known for his idiosyncratic english which is far from fluent, but loved by many - so I reckon the singer is pointing out that you don't need to be word perfect in order to get meaning across.