Hi, I would not treat this as a normal CNO/VCO permissions issue, because New-Cluster -AdministrativeAccessPoint Dns also fails and that mode is specifically intended to create an AD-detached cluster without CNO/VCO objects in AD DS. Microsoft’s WSFC documentation still assumes the nodes are in the same Active Directory domain and states that cluster creation normally depends on AD computer-object permissions, while Microsoft Entra Domain Services is a managed domain with important administrative limitations, including no Domain Admin or Enterprise Admin privileges.
I have not found an official Microsoft article confirming WSFC/SQL Always On Availability Groups as a supported deployment on Microsoft Entra Domain Services, so if this is production SQL HA, the safest supported design is still self-managed AD DS domain controllers in Azure or an extended on-prem AD DS domain. Before concluding that it is an Entra Domain Services limitation, run Test-Cluster -Node SQL-DR -Verbose and collect Get-ClusterLog -UseLocalTime -Destination C:\Temp immediately after the failure, then check Microsoft-Windows-FailoverClustering/Operational and System logs for the exact stage where the node is being classified as already clustered. Also run Clear-ClusterNode -Force locally on the target node once, because Microsoft provides this cmdlet to remove residual cluster configuration from an evicted node, even though you have not found obvious local cluster state.
If the same error persists on a freshly built VM with no cluster state and with DNS-only administrative access point, I would open a Microsoft support case and provide the cluster validation report, cluster logs, AD computer object attributes, and Entra Domain Services details, because this may be an unsupported edge case or product issue in WSFC validation against a managed domain.