File URL changes unexpectedly

Hoping to get some help as I’ve been searching all day and can’t find any similar issues out there to figure this out.

When I replace files with the ‘Just replace the file’ option (the other option does the same thing too actually), the file URL unexpectedly changes, for example, from:
subdomain.site.com/files/filename.pdf
to:
subdomain.site.com/files/C:/servername/subdomain.site.com/files/filename.pdf

I have set up custom media folder in wp-config.php to go to Files folder. Direct uploads work fine, but replacing media causes the file url to inject other path info and break links.

There is also a subdirectory (not a multisite installation) within the root directory with an htaccess file in root so that the posts/pages of the subdirectory don’t go back to the root directory. The site is a subdomain and still in staging environment. Server is on-premises and have support from our IT dept for server/DNS/IIS set up.

Aside from the file path issue when replacing media, everything else on the site and subdirectory sites are working fine.

I’m thinking I need to change something in wp-config or htaccess file but not sure or maybe this be a server settings/permissions issue?

Hope to get some help to figure this out, thank you!