the -I {} is the marker, which says the file name is {}
find . -type f -name INPUT.txt -print0 | xargs -0 -I {} sed -i.bak '/^#/d' {}
The above could also be done like this
find . -type f -name INPUT.txt -print0 | xargs -0 sed -i.bak '/^#/d'
But I found using explicit marker for the argument more clear. This is useful. If using a command that needs more than one argument, the marker is needed anyway, so might as well get used to using it. Marker can be anything. So this works also
find . -type f -name INPUT.txt -print0 | xargs -0 -I file sed -i.bak '/^#/d' file