Indeed, they called it "SS plava divizija" (SS Blue Division). This nickname appears in March-August 1944 documents. Apparently, according to the "Zbornici" staff, the Partisans didn't mistake it for another division, but they called it "Blue" because of the blue tassels on fezzes. This doesn't make much sense - not only since the tassels were black - even if they were pink, the chances are extremely low that anyone would nickname a unit by such a minor detail on uniform. So the reason for such a nickname remains unknown.
Cheers and over to Huska,
Ivan