Instead of using the <IMG> tag maybe you should convert the image to base 64 and really "embed" it into the XML. My guess is the PDF will render it properly if you do this.
For an example of how to do this check out the demo that ships with TestStand. It demonstrates how to put base 64 images into your report.
C:\Users\Public\Documents\National Instruments\TestStand 2019 (32-bit)\Examples\Demos\Mobile Device Test
Cheers,