Setting up debugging with XDebug 3 and WSL2

Tried the steps mentioned in this post and post. However, debugging continues to fail due to the following error: 

Connection was not established. Cannot start debugger session with 'Xdebug 3.0.4'

XDebug Config:

zend_extension=xdebug.so

xdebug.remote_autostart=1
xdebug.remote_enable=1
xdebug.remote_host=192.168.173.130
xdebug.remote_port=9000
xdebug.client_host=192.168.173.130
xdebug.client_port=9000
xdebug.log=/var/log/xdebug.log
#xdebug.discover_client_host=false
xdebug.idekey=PHPSTORM

This is a portion of the command executed by PHPStorm when debugging:

Unsure as to why the remote_host is passed as 127.0.0.1

php -dxdebug.remote_enable=1 -dxdebug.remote_mode=req -dxdebug.remote_port=9000 -dxdebug.remote_host=127.0.0.1 "-d xdebug.remote_host=192.168.173.130" "-d xdebug.client_host=192.168.173.130" "-d xdebug.remote_port=9000" -dxdebug.client_port=9000

And this is a portion of the command executed by PHPStorm when running a script/test:

php "-d xdebug.remote_host=192.168.173.130" "-d xdebug.client_host=192.168.173.130" "-d xdebug.remote_port=9000" -dxdebug.client_port=9000

In this case PHPStorm does not automatically pass 127.0.0.1 as remote_host's value and only the values setup in the XDebug options in IDE are passed.

Had uninstalled anti-virus and also disabled the firewall. However, debugging connection fails. Strangely nothing is written to xdebug logs.

System Info

PHPStorm Version: PhpStorm 2020.2.4
Build #PS-202.8194.11, built on November 25, 2020
Licensed to Nikhil Ranka
You have a perpetual fallback license for this version
Subscription is active until May 4, 2022
Runtime version: 11.0.9+11-b944.49 amd64
VM: OpenJDK 64-Bit Server VM by JetBrains s.r.o.
Windows 10 10.0

Would be great if you could help in setting this up.

Thanks!