diff --git a/mmv1/templates/terraform/custom_flatten/vertex_ai_reasoning_engine_env.go.tmpl b/mmv1/templates/terraform/custom_flatten/vertex_ai_reasoning_engine_env.go.tmpl
index 3f134b02871d..55cb312b2295 100644
--- a/mmv1/templates/terraform/custom_flatten/vertex_ai_reasoning_engine_env.go.tmpl
+++ b/mmv1/templates/terraform/custom_flatten/vertex_ai_reasoning_engine_env.go.tmpl
@@ -13,6 +13,24 @@ func flatten{{$.GetPrefix}}{{$.TitlelizeProperty}}(v interface{}, d *schema.Reso
 	if v == nil {
 		return nil
 	}
+	hasTelemetryConfig := false
+	if envRaw, ok := d.GetOk("spec.0.deployment_spec.0.env"); ok && envRaw != nil {
+		var envList []interface{}
+		if set, ok := envRaw.(*schema.Set); ok {
+			envList = set.List()
+		} else if list, ok := envRaw.([]interface{}); ok {
+			envList = list
+		}
+		for _, e := range envList {
+			if m, ok := e.(map[string]interface{}); ok {
+				if m["name"] == "GOOGLE_CLOUD_AGENT_ENGINE_ENABLE_TELEMETRY" {
+					hasTelemetryConfig = true
+					break
+				}
+			}
+		}
+	}
+
 	l := v.([]interface{})
 	transformed := make([]interface{}, 0, len(l))
 	for _, raw := range l {
@@ -20,7 +38,7 @@ func flatten{{$.GetPrefix}}{{$.TitlelizeProperty}}(v interface{}, d *schema.Reso
 			continue
 		}
 		original := raw.(map[string]interface{})
-		if original["name"] == "GOOGLE_CLOUD_AGENT_ENGINE_ENABLE_TELEMETRY" {
+		if original["name"] == "GOOGLE_CLOUD_AGENT_ENGINE_ENABLE_TELEMETRY" && !hasTelemetryConfig {
 			continue
 		}
 		transformed = append(transformed, map[string]interface{}{
diff --git a/mmv1/third_party/terraform/services/vertexai/flatten_vertex_ai_reasoning_engine_env_test.go b/mmv1/third_party/terraform/services/vertexai/flatten_vertex_ai_reasoning_engine_env_test.go
new file mode 100644
index 000000000000..75776644191f
--- /dev/null
+++ b/mmv1/third_party/terraform/services/vertexai/flatten_vertex_ai_reasoning_engine_env_test.go
@@ -0,0 +1,138 @@
+package vertexai
+
+import (
+	"reflect"
+	"testing"
+
+	"github.com/hashicorp/terraform-plugin-sdk/v2/helper/schema"
+)
+
+func TestFlattenVertexAIReasoningEngineSpecDeploymentSpecEnv(t *testing.T) {
+	resourceSchema := map[string]*schema.Schema{
+		"spec": {
+			Type:     schema.TypeList,
+			Optional: true,
+			Elem: &schema.Resource{
+				Schema: map[string]*schema.Schema{
+					"deployment_spec": {
+						Type:     schema.TypeList,
+						Optional: true,
+						Elem: &schema.Resource{
+							Schema: map[string]*schema.Schema{
+								"env": {
+									Type:     schema.TypeSet,
+									Optional: true,
+									Elem: &schema.Resource{
+										Schema: map[string]*schema.Schema{
+											"name": {
+												Type:     schema.TypeString,
+												Required: true,
+											},
+											"value": {
+												Type:     schema.TypeString,
+												Required: true,
+											},
+										},
+									},
+								},
+							},
+						},
+					},
+				},
+			},
+		},
+	}
+
+	apiResponseEnv := []interface{}{
+		map[string]interface{}{
+			"name":  "GOOGLE_CLOUD_AGENT_ENGINE_ENABLE_TELEMETRY",
+			"value": "true",
+		},
+		map[string]interface{}{
+			"name":  "CUSTOM_VAR",
+			"value": "custom_val",
+		},
+	}
+
+	// Case 1: Telemetry env var NOT configured in ResourceData
+	t.Run("Telemetry not in config - filtered out", func(t *testing.T) {
+		d := schema.TestResourceDataRaw(t, resourceSchema, map[string]interface{}{
+			"spec": []interface{}{
+				map[string]interface{}{
+					"deployment_spec": []interface{}{
+						map[string]interface{}{
+							"env": []interface{}{
+								map[string]interface{}{
+									"name":  "CUSTOM_VAR",
+									"value": "custom_val",
+								},
+							},
+						},
+					},
+				},
+			},
+		})
+
+		res := flattenVertexAIReasoningEngineSpecDeploymentSpecEnv(apiResponseEnv, d, nil)
+		resList, ok := res.([]interface{})
+		if !ok {
+			t.Fatalf("Expected []interface{}, got %T", res)
+		}
+
+		expected := []interface{}{
+			map[string]interface{}{
+				"name":  "CUSTOM_VAR",
+				"value": "custom_val",
+			},
+		}
+
+		if !reflect.DeepEqual(resList, expected) {
+			t.Errorf("Expected %v, got %v", expected, resList)
+		}
+	})
+
+	// Case 2: Telemetry env var IS configured in ResourceData
+	t.Run("Telemetry in config - preserved in state", func(t *testing.T) {
+		d := schema.TestResourceDataRaw(t, resourceSchema, map[string]interface{}{
+			"spec": []interface{}{
+				map[string]interface{}{
+					"deployment_spec": []interface{}{
+						map[string]interface{}{
+							"env": []interface{}{
+								map[string]interface{}{
+									"name":  "GOOGLE_CLOUD_AGENT_ENGINE_ENABLE_TELEMETRY",
+									"value": "true",
+								},
+								map[string]interface{}{
+									"name":  "CUSTOM_VAR",
+									"value": "custom_val",
+								},
+							},
+						},
+					},
+				},
+			},
+		})
+
+		res := flattenVertexAIReasoningEngineSpecDeploymentSpecEnv(apiResponseEnv, d, nil)
+		resList, ok := res.([]interface{})
+		if !ok {
+			t.Fatalf("Expected []interface{}, got %T", res)
+		}
+
+		expected := []interface{}{
+			map[string]interface{}{
+				"name":  "GOOGLE_CLOUD_AGENT_ENGINE_ENABLE_TELEMETRY",
+				"value": "true",
+			},
+			map[string]interface{}{
+				"name":  "CUSTOM_VAR",
+				"value": "custom_val",
+			},
+		}
+
+		if !reflect.DeepEqual(resList, expected) {
+			t.Errorf("Expected %v, got %v", expected, resList)
+		}
+	})
+}