I am glad it worked out for a win-win for all.
But, there is still some explaining to do to figure out the root cause of the problem and whether this Denon unit is in the clear in all aspects... I could have misunderstood the problem fixed but it is useful to be clear about this.
The below isn't exactly right or unambiguous.
The output path form my PC however was 8 channels (determined by Intel GPU HDMI implementation in my Intel CPU). I had turned off all channels beside left and right assuming that would simulate simple 2 channel playback. Well, turned out this was the problem!
First, the number of channels isn't determined by the GPU HDMI implementation which as far as I understand, just provides the transmitted data to the audio and video drivers above it. All HDMI ports can transmit 8 channels at the HDMI protocol level.
Windows driver for HDMI (generic or chip vendor supplied) look at the EDID information coming over HDMI data to determine the capability of the downstream unit. For example, if you connect a typical TV directly, most TVs will only send Stereo capabilities in the EDID and so the Audio Device in Windows corresponding to the HDMI port will only show up to Stereo not any more. It will look something like this in the device properties (even when the HDMI is capable of sending multiple channels to something else connected to it). You cannot output more than 2 channels to such a device. For example, it may look something like this.
A typical AVR would be sending ts capabilities over EDID (overriding TV audio capabilities if signal passing through) which I believe is 8 channels max (uncompressed, unencoded PCM - more channels are accommodated via encoding/bitstreaming). The HDMI drivers then recognize it as a 8 channel device and make that capability available in the HDMI properties. Most AVRs will send the max channels it is capable of rather than number of speakers currently attached since you don't want the source to be reconfigured every time, you change a zone or upgrade speakers.
If you are using a ASIO or Wasapi driver to deal directly with the device, that is what the source will see as device capabilities. If you are going through Windows Audio engine, then there is additional configuration you can do in Windows Device Manager to select the number of speakers actually attached, whether they are large/small etc and can do its own up/down mixing which will affect what is going out in each channel. But this only comes into play when you are using the internal Windows mixer in shared mode.
Here is the unexplained part:
When you say "
I had turned off all channels beside left and right", it is not clear what this is referring to. In the source on the PC for the sounds being generated or in the AVR for the number of speakers attached? The distinction is important.
From what I understand,
there is a problem when the unit is receiving more channels than the AVR is configured for in number of speakers attached and
this should not happen. This is not an erroneous input. AVRs can receive 7.1 input when configured for 2, 2.1 or 5.1 speakers.
There are two things AVRs can do and ideally based on a user configurable setting - Either just drop the other channels or down-mix if less speakers than channels received. What is the default configuration on this unit?
Neither of these should generate noise/clipping/distortion if done correctly.
First of all, your PC source should be sending signals only in the channels you have selected for use in the source (not the AVR). It is not clear to me what your source is actually doing and whether it is sending the same signal via all channels when it looks at a 8 channel audio device. This is something that should be looked at and standardized across all tests over HDMI.
If source PC is sending nothing over the other 6 channels, down-mixing to stereo or dropping the channels in the AVR should have no effect on the measurement. (It would also be useful to ensure that there is no noise being sent over in those channels in this kind of configuration).
So, if this was the case here, then there is a problem with the AVR.
If it is sending the same signal over all 8 channels, there should be no effect on the measurement IF down-mixing is disabled in the AVR (either explicitly or by default).
If this was the case here, this is still a problem with the AVR.
If there is down-mixing in the AVR and it received signal in all 8 channels, then any down-mixing that creates clipping/distortion/noise
is a bug in the down-mixing implementation. There is a lot of philosophical differences in how the down-mixing should happen (i.e., in what proportion those channels should me mixed) but in no situation should this result in clipping or significant distortion. This kind of situation can arise in many, many 5.1 installations where a 7.1 source content is sent over. Or when listening in stereo mode in another zone.
Perhaps Denon didn't expect the boundary condition of 8 channels of 0db signal sent over over all channels to be down-mixed into 2 channels but then that is an engineering failure to be corrected in firmware.
But to be really sure, I would ask Amir to verify and measure what comes out of the source PC in each channel and document and make it standard for all tests of any future HDMI based devices. This is just setting the test standard and being clear about what one is doing for the test.
Based on that, we can determine if the Denon passed or failed the boundary condition if not the typical case.
The above would apply to any AVR not to single out this one.