Failed to update domain: ERROR: Domain is used beyond the scope of the service

Error Message

When modifying the coded values of the domain using the ArcGIS Solutions Deployment tool, the Update Domain process fails with the following error message:

Error:   
Failed to update domain: ERROR: Domain is used beyond the scope of the service.

Cause

This error occurs when the hosting server (Portal for ArcGIS or ArcGIS Online) already contains a hosted feature layer with the same domain name.

Solution or Workaround

Change the domain name when modifying the coded values.

Note:
For more information on the issue and related workflow, refer to the following GeoNet thread: Update Definition with JSON - cannot find the file to modify.