In this deployment of SCCM 2012 R2, the WSUS is installed on a separate server.
There are so many options that need to configured to make SCCM work that I missed one thing and SCCM was not able to do initial configuration on WSUS server which is done at the 1st Sync.
Upon checking Monitoring/Component Status/SMS_WSUS_SYNC_MANAGER.
Lets check WCM.log as per the message.
The “Attempting connection to WSUS server: WSUS-SRV” message just above the error gave the hint.,
Go to Administration\Overview\Site Configuration\Servers and Site System Roles select the Site System server on which Software Update point role is installed.
Under Site System Roles section select “Software Update Point” and go to the properties.
In Proxy and Account settings tab, provide the credentials which has administrative rights on WSUS server. In my example I have used domain Administrator account, but in production you must have a dedicated action account, you can also use the same account which you setup to install SCCM clients on workstations.
The sync was success.