I never understood this concept of restricted metric. Consider the following theorem.
http://www.math.psu.edu/wysocki/M403/Notes403_4.pdf
I don't quite understand this concept since under usual circumstances when working with $\mathbb{R}^n$, take any subset of $\mathbb{R}^n$, then we can simply equip the subset with the Euclidean distance as in $\mathbb{R}^n$.
Here it is pointless to talk about the restriction, because it is understood that the metric is now defined on the Cartesian product of the subset. I have never seen anyone making this distinction.
Can someone demonstrate a case where $S$ a subset of $(M,d)$, where the restricted metric $d|_S$ can be quite different than the "ambient" metric $d$?

The key here is that the metric on $Y$ is a function $d_Y\colon Y\times Y\to [0,\infty)$. The "original" metric $d_X$ is a function $d_X\colon X\times X\to [0,\infty)$.
You have $d_Y(u,v) = d_X(u,v)$ for every $(u,v) \in Y\times Y$, but that does not mean the two functions are the same: they coincide on every point of $Y\times Y$, but they do not have the same domain. They are not formally the same mathematical object.
In particular, if $Y\subsetneq X$ and $u,v\in X\setminus Y$, then $d_X(u,v)$ is defined, but $d_Y(u,v)$ is not.