microsoft azure smtp email relay setup

This is more like corollary to what @mcollier has stated. Given that you are already on Azure and you get 25,000 free emails (there are higher plans as well) with your subscription as well.

You can configure a Virtual SMTP server which relays to the sendgrid services. For the development perspective you will have the view of using your own SMTP server / service. Setting up a sendgrid based service is explained in this link.

I have used sendgrid earlier and my experience with this was amazing. As @mcollier has pointed out, using services like Sendgrid will give good chance of staying away from spam problem, if you try to setup and use the SMTP service of your own because of the reverse lookup etc.

PS: The above Virtual SMTP Server can be replaced with Amazon SES, which is equivalently a good service. Check out more info here.

First, assuming you're using a Windows Azure IaaS VM. Correct? If so, I think you need to enable that role/feature in Windows Server.

Second, why the need to send emails from that specific server? Would a service like SendGrid work? One problem people sometimes have with email servers in Windows Azure is the domain of your service (something.cloudapp.net) does not match your vanity domain when a reverse DNS lookup is performed. This could cause the email to be flagged as spam (since you don't technically own the sending domain, something.cloudapp.net).

I developed an direct relay application using the normal RFC email commands and lock that on my application, but strange that some test emails get delivered using the relay on windows AZURE VM, and all other mails are not getting any bounce response, and making a sense that every email is being delivering,

This is strange behaviour on azure vm.

so it means you can't send email using azure vm as a smtp mail server, if like to test then simply download promailer marketing manager from jsmtp.com