Q: cant install ios with itunes

I'm guessing that you don't have enough space on your iPhone, (not your computer).  See the section "Delete content manually" in:

If you need more space for an iOS update - Apple Support

Yes, phone space is still important when updating iOS with iTunes, although you do need less.  Basically, by using iTunes you are saving some iPhone space by expanding the iOS update on your computer instead of your iPhone before copying those files to your iPhone.  You iPhone still needs the space required (in either case) to receive those expanded files.

I'm very surprised that if you do indeed have 127 GB of space on your computer that you are getting the message 'not enough space on your computer'.  Something seems fishy.  Also 2.75 GB of space on your iPhone may not be enough to update from iOS 7.1.2 (from your tag line) to 9.3.4.  I suspect that is the problem.  Again, see the section "Delete content manually" in:

If you need more space for an iOS update - Apple Support