Can one use CouchSurfing to prove accommodation for a Schengen visa to Iceland from India?
There is nothing in the regulations that prevents an applicant from using a hospitality exchange or social networking for accommodation.
They would treat these arrangements in the same way as if friends were offering you a place, but since they are not real friends, you will need to be a bit careful with how you present your evidence. It means you can't just say 'couchsurfing' on your application; instead you'll need to demonstrate that firm arrangements are in place with each provider and that these arrangements are an acceptable substitute for a personal invitation.
It would be wise to include a 'backup provider' for each place you plan to stay to show that you have a contingency if the planned accommodation is not available or turns out to be unsafe or unlawful or otherwise unacceptable.