GitHub user fnavidan added a comment to the discussion: VM instances get VR's 
IP as DNS server but cannot resolve through VR

@weizhouapache Yes, using an external dns server inside VR and VMs works fine. 
The issue is that when VR is deployed it sets port=0 in /etc/dnsmasq.conf which 
causes dnsmasq not to listen on port 53. Manually uncommenting this line 
followed by dnsmasq restart makes it working fine. This issue matters to us 
because on latest templates we have used cloud-init which sticks on boot 
because it cannot find cloudstack data source. Logs on that VM shows it is 
looking for data-server.cloud.internal for password and user data.

GitHub link: 
https://github.com/apache/cloudstack/discussions/11749#discussioncomment-14801859

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