diff --git a/azurelinuxagent/common/cgroupapi.py b/azurelinuxagent/common/cgroupapi.py
index 0d0e030874..b72a2b31a2 100644
--- a/azurelinuxagent/common/cgroupapi.py
+++ b/azurelinuxagent/common/cgroupapi.py
@@ -510,6 +510,8 @@ def create_cgroup(controller):
                 stderr.truncate(0)
 
                 # Try invoking the process again, this time without systemd-run
+                logger.info('Extension invocation using systemd failed, falling back to regular invocation '
+                            'without cgroups tracking.')
                 process = subprocess.Popen(command,
                                            shell=shell,
                                            cwd=cwd,
diff --git a/tests/common/test_cgroupapi.py b/tests/common/test_cgroupapi.py
index 8d892e841a..12575860ce 100644
--- a/tests/common/test_cgroupapi.py
+++ b/tests/common/test_cgroupapi.py
@@ -507,16 +507,18 @@ def mock_popen(*args, **kwargs):
 
     @patch('time.sleep', side_effect=lambda _: mock_sleep(0.001))
     def test_start_extension_command_should_use_fallback_option_if_systemd_times_out(self, _):
-        # Mock systemd timeout and make sure the failure is only attributed to the extension if the command fails
-        # using the fallback option
+        # Systemd has its own internal timeout which is shorter than what we define for extension operation timeout.
+        # When systemd times out, it will write a message to stderr and exit with exit code 1.
+        # In that case, we will internally recognize the failure due to the non-zero exit code, not as a timeout.
         original_popen = subprocess.Popen
-        success_cmd = "echo 'success'"
+        systemd_timeout_command = "echo 'Failed to start transient scope unit: Connection timed out' >&2 && exit 1"
 
         def mock_popen(*args, **kwargs):
-            # Inject a syntax error to the call
+            # If trying to invoke systemd, mock what would happen if systemd timed out internally:
+            # write failure to stderr and exit with exit code 1.
             new_args = args
             if "systemd-run" in args[0]:
-                new_args = (args[0].replace(success_cmd, "sleep 1s"),)    # Inject sleep for timeout
+                new_args = (systemd_timeout_command,)
 
             return original_popen(new_args, **kwargs)
 
@@ -524,21 +526,28 @@ def mock_popen(*args, **kwargs):
 
         with tempfile.TemporaryFile(dir=self.tmp_dir, mode="w+b") as stdout:
             with tempfile.TemporaryFile(dir=self.tmp_dir, mode="w+b") as stderr:
-                with patch("azurelinuxagent.common.cgroupapi.subprocess.Popen", side_effect=mock_popen):
-                    with patch("azurelinuxagent.common.cgroupapi.SystemdCgroupsApi._is_systemd_failure",
-                               return_value=True):
-                        extension_cgroups, process_output = SystemdCgroupsApi().start_extension_command(
-                            extension_name="Microsoft.Compute.TestExtension-1.2.3",
-                            command="echo 'success'",
-                            timeout=300,
-                            shell=True,
-                            cwd=self.tmp_dir,
-                            env={},
-                            stdout=stdout,
-                            stderr=stderr)
+                with patch("azurelinuxagent.common.cgroupapi.subprocess.Popen", side_effect=mock_popen) \
+                        as patch_mock_popen:
+                    extension_cgroups, process_output = SystemdCgroupsApi().start_extension_command(
+                        extension_name="Microsoft.Compute.TestExtension-1.2.3",
+                        command="echo 'success'",
+                        timeout=300,
+                        shell=True,
+                        cwd=self.tmp_dir,
+                        env={},
+                        stdout=stdout,
+                        stderr=stderr)
 
-                        self.assertEquals(extension_cgroups, [])
-                        self.assertEquals(expected_output.format("success"), process_output)
+                    # We expect two calls to Popen, first for the systemd-run call, second for the fallback option
+                    self.assertEquals(2, patch_mock_popen.call_count)
+
+                    first_call_args = patch_mock_popen.mock_calls[0][1][0]
+                    second_call_args = patch_mock_popen.mock_calls[1][1][0]
+                    self.assertIn("systemd-run --unit", first_call_args)
+                    self.assertNotIn("systemd-run --unit", second_call_args)
+
+                    self.assertEquals(extension_cgroups, [])
+                    self.assertEquals(expected_output.format("success"), process_output)
 
     @attr('requires_sudo')
     @patch("azurelinuxagent.common.cgroupapi.add_event")