In-place up-gradation of SQL server on Azure with pre-image installed.
Once the VMs are deployed, you can do anything you want to them. Apply service packs, cumulative updates, or go full blown in place upgrade. You are responsible for anything that happens inside of the VM once you deploy it.  However, if you have to redeploy the VM, you may be reverted back to the previous version of SQL as it is built off of that image. 

Additionally, it is a best practice to migrate to the new version of SQL vs doing in an in place upgrade. It is less risky to migrate and provides you more ways to roll back in the event of a problem than to do in place. You also can test your application on the new version before you upgrade so you know how your application will behave on the new version. 

I can say with certainty, you will run into behavior differences as the query engine and cardinality estimator of SQL Server 2016 was completely rewritten to be much more efficient. In most cases, your existing queries will run faster, but in some cases, your queries will run slower. You will want to know that ahead of time so you can mitigate those issues before the users experience them and are soured on the platform.