Had a similar issue with a conversion from Cloud service (classic) to Virtual machine scale set failing due to a custom tagging policy being enforced in the Azure tenant.
Found this blog that offered a workaround for reverting back to the original CMG config. https://rui-qiu.com/sccm/fix-cmg-conversion-failed-from-classic-to-vm-scale-set/
"So I contacted Microsoft, the fix is the manually revert back to CMG classic state inside SCCM console, and do the conversion again. Here are the steps:
1. Stop SMS Executive service
2. Run SQL query on your SQL Server: update azure_service set FQDN = 'xxx.cloudapp.net', DeploymentModel = '1'
3. Start SMS Executive service
4. Monitor cloudmgr.log, wait for CMG convert back to Classic"
I was able to use that SQL query to get my CMG back online in the Cloud service (classic) mode while I work through the security policy that is blocking my upgrade.