We have another picture for older OSes (Windows Server 2012/Windows 8 and older). For such OSes, you need to verify that Data Exchange Service (DES) is turned on and running.
DES provides shared registry values (HostSystemOSMajor and HostSystemOSMinor under the hive HKLM\SOFTWARE\Microsoft\Virtual Machine\Guest\Parameters) between host and VMs for determining IS applicability. These values should be existed in VM in order to get IS updates from WU. If DES has never been enabled on VMs – IS won’t be provided.