The goal of your answer is to acknowledge that, at some point, you will have a client that wants the impossible. Demonstrate your comfort level and competency in navigating the situation. You want to show that you can create solutions in challenging situations.

This isn't a trick question. You shouldn't say something like, "I would never tell a client no." Choose an example in which you found a resolution to the situation that led to a compromise.

I think it is important to tell a client "no" if they ask for something that is overly ambitious or could result in a negative outcome. The last thing I want to do is promise to deliver something I can't. However, I wouldn't tell a client "no, this can't be done." I would tell the client, "I can't accomplish that, but here is what I can do." By taking time to explore with the client, I may be able to find a solution or compromise that results in most of what they wanted to accomplish.