The issue was that the XML provided as an exampl was malformed.
The options for the changes can either be entered into the command line or in the XML. There was also information missing in the XML, specifically nowhere in the documentation for updating vm filters at the backupset is any mention of the instance.
I spoke to Brugesh in CommVault and few other people and once all the options were added to the XML it worked like a charm. The subclient name must be set to "Do Not Backup"
Below you'll find a working xml that we put together.
<?xml version="1.0" encoding="UTF-8"?>
<subclientName>Do Not Backup</subclientName>
<children allOrAnyChildren="1" name="" type="10" path="" displayName="PSCAPPD01104" equalsOrNotEquals="1" />
<filters filter="" filterType="" vmGuid="" />