With further testing, It seems like the expansion file cannot be detected if tested locally. An app need to be submitted to Google Play along with it's expansion file for it to be detected.
Even if we try to manipulate the expansion file (delete, replace) AFTER downloading+installing the whole package via Google play, the detection will still fail, as if the expansion file was never there. It will only be detected if the app comes with the unaltered original file downloaded from Google.
Which means, we can't test the project locally to see if the expansion file is working properly, before uploading it to Google Play. We can only test it by uploading the whole package to Google Play.