Yeah, because while distributing the basic .iso is illegal what are Microsoft's damages? They distribute it for free anyway, their losses are $0 from someone else distributing it.
If JK Rowling gave away Harry Potter ebooks because of COVID-19, you can't just take those books and replace all instances of "Wand" with "Penis" and distribute it because she made it available for no money. It's not all about money but also about moral rights; The right to the integrity of the work.
I think no one is claiming that distributing modified isos is legal, actually even distributing the unmodified ISO files would not be legal.
The problem is that Microsoft didn't make a take down request based one them distributing ISO files. But based on them "disabling features in windows" in that ISO files.