Hang on, are you trying to burn a playlist onto a CD? If so, I believe that's a different option. The option you have mentioned above is for importing into iTunes, not burning playlists.
Highlight the Playlist you wish to burn. Only then will you see this menu:
and click on the Burn Playlist to Disc option to get the following menu, on which you need to check the box named MP3 CD;
I have never used this burn option, but I assume that if you do not select the MP3 CD box, then the burn to disc will be use the format iTunes already has the files in.
Or have I misunderstood you?