Hi Vivek,
If the LabVIEW VI is handling the error, then what you probably want to do is make the VI have an Error Out output terminal. You'd have to wire the appropriate error out wires to the terminal of course.
This way, when you call the VI from TestStand, you can check the value of the Error Out and decide in TestStand how to handle it (skip the remaining steps, popup a message, etc).
Jervin Justin
NI TestStand Product Manager