Finally found out that there was no error on dendron paste image extension and it was only my mistake to not open the dendron workspace. I opened the parent folder containing the

vault

and

dendron.code-workspace

settings file in VScode and directly tried to upload images into the notes, without clicking the

Open Workspace

pop up that comes at the right bottom corner to enable the customized workspace settings. Lesson learnt for me, I hope this answer will be useful for someone else.