Azure App Service Deploy - Not able to override appsettings.json

I have an Azure App Service Deploy task in my pipeline to deploy my Web Api Core app to the Azure App Service. The task has the following yaml -

- task: AzureRmWebAppDeployment@4
  inputs:
    ConnectionType: 'AzureRM'
    azureSubscription: 'myserviceconnection'
    appType: 'webAppLinux'
    WebAppName: 'mytestwebapp'
    packageForLinux: '$(Build.ArtifactStagingDirectory)/**/*.zip'
    AppSettings: 'TestWebApp/TestWebApp/appsettings.json'

I have been following this document on how to update the settings in .json files. From what I could understand, I had to create a variable in the pipeline which matches the key I need to update. Let's say I have the following Json structure in my appsettings.json -

{
  "AllowedHosts": "*",
  "ServiceConfiguration": {
    "Key1": "value1",
    "Key2": {
      "Key3": "value3",
      "Key4": "value4"
    }
  }
}

Suppose I have to update key1 to somenewvalue1 and key2.key3 to someothervalue3 and so on. So I created new variables by hitting the Variables button on the pipeline and added Key1 and key2.key3 as variables with appropriate values (as a side note, the value is a constant string, but I want this to be a dynamic value which will be provided by another task in the pipeline). Also, I provided the path for the appsetting file as shown in the image below -

But, when I run the pipeline, I get the following error-

Error: BadRequest - Parameter name cannot be empty. (CODE: 400)

I came across this SO question and also created the app setting on azure portal, but this also didn't work

What am I doing wrong here.

As a side question, As seen in the first image, what is the difference between File Transformation & Variable Substitution Options and Application and Configuration Settings and when to use what.

EDIT

Based on the comment, I was able to resolve the issue, so no more errors and I was able to verify the updated setting in the azure portal.

However, when I see the appsetting.json from Kudu inside the Site wwwroot folder under Browse Directory, I couldn't see it updated. Why are these valuees different, and if so, which value is actually considered.

Thanks