Update status activity notification will not work if the Request new status is set with the property called Make Resolved? to Yes.
Login to ServiceDesk as Administrator.
Click on Administration Tab -> Request -> Request Status.
Open any of the Request Status in Edit Mode.
There is a check box named "Make Resolved?" in the Request status details. If this check box is set to Yes for any status, update status activity notification will not be executed for all those status changes.
Use Resolved activity notification for all such type of status changes.