Could you ask him why he wants to upset you, and why he is happy to use his children to do so? That seems a very strange thing to say, don't you think?
Otherwise, it is often the case that people with the most money spend the least on things that don't make financial sense, such as expensive clothes for children who will grow out of them. Hand me downs are sensible, although clothes that don't fit, and ones that are inappropriate for the season are perhaps a step too far.
It could be that your son was being sarcastic when he said that he was just trying to upset you (meaning that you shouldn't get upset about how he and his wife dress their children). It's not my sense of humour, but some people do find saying that sort of thing amusing.
If the children are otherwise cared for, and are not suffering as a result of how they are dressed (eg getting chapped legs because of the shorts, or marks where waistlines dig into them), then it really isn't your call, I'm afraid.
My own mother used to keep telling me that I should enjoy dressing my daughter in pretty dresses, when I preferred to let her run about in jeans (often passed down from her brother) so she was comfortable. She was a fair bit younger than eight at that point though. By eight she had her own ideas about what she wanted to wear - what does your granddaughter feel about it?