Hi MJ...not sure if you've found a resolution but wanted to touch base again. While some of this is a confirmation of what others have provided, this is my summary:
As Govinda stated, with the TX Text control used via an OLE control there is more functionality than Appeon has exposed (not advocating this approach, just drawing a comparison and it should be noted that to use this approach requires the full ActiveX version from Text Control for which the license isn't cheap). One of the key differences between that ActiveX version and what we have access to via the RTE control is that with the former you can pass a parameter, while you're saving, which indicates whether the image should be embedded in the file or saved with a reference/ link to the image file. With a RTE control it would appear that when you paste an image it, by default, will make a reference to a file (sometimes, but depends on the app you've copied it from, see exception below) and it's doing so incorrectly, per Miguel's comments and ticket 5954. It doesn't matter whether you do so via CTRL + V or use the control's Paste method, the result is the same. However, when you use the InsertPicture method it will, by default, actually embed the image into the file (using base64 encoding).
The developer doesn't have any choice with Paste/ CTRL+V or InsertPicture in terms of whether it is linked or embedded. The way the image is placed in the RTE control dictates what happens...usually. If you paste, it tries to link/ reference (and gets it wrong) or doesn't even place a img tag in the document. This was copying and pasting from MS Paint. However pasting the same thing from Paint 3D actually embeds the image, like it does with InsertPicture. Only when pasting from Snipping Tool will it actually place a img tag with the name of a tmp file which is no longer available, which may be what you want (in terms of placing an img tag, not the tmp file part). However you can't open saved images with Snipping Tool, only capture new images, so you couldn't use it as the intermediary tool to open an existing file, paste it and then manually correct the tag (not to mention the inconvenience of requiring these extra steps). No other image application that I tried placed the img tag in the file. Part of the above seems to reflect Miguel's experience too.
So, I'm not sure what your use case is and whether your users need to 1) be able to insert images via pasting or 2) be able to show the most current version of the image if changes were made to it, an advantage with linking or 3) be able to paste an image that has been saved, or one that has just been created/ captured but not saved anywhere, or both? If they are not requirements then you may be able to get around these limitations by using the InsertPicture method. Obviously this will also make your HTML files larger but maybe that would be the lesser of the evils. If you need to have images linked/ referenced, then you will likely have to resort to (I think) Miguel's method which is to insert the img tag programmatically (or modify the incorrect tag when inserted by an application that refers to a tmp file).
It's interesting to note that when you create a RichText file with another application, say MS Word, that has an image that was linked in it does include a link/ reference properly. But if you open that same RichText file in a RTE control 1) the picture does not display, just a box where the picture should be and 2) while the src img link/ reference tag is there the value is wrong (once saved as HTML) so something is getting lost in the translation. If the MS Word generated RichText file has an image embedded in it the RTE control seems to be able to display that fine as well as save as HTML fine.
Hopefully I haven't confused you more and not sure the above has helped much, maybe so if InsertPicture is an option for you.
I agree with Miguel that the RTE control is problematic in it's current form as it relates to pasting images. Hopefully this will be corrected/ improved soon but the ticket that was entered for this issue doesn't seem to be aging well :-(
Regards,
Mark