I am trying to send email to an outlook email address using my test SMTP server and got this error. Using PHPMAILER module for making the SMTP connection.
You're being greylisted, and it's working for them!
Greylisting is an anti-spam measure that attempts to identify badly-behaved mail clients. A large proportion of spambots generate messages and try to send them immediately, and if they fail, they give up (because they don't really care), whereas a well-behaved mail server will heed the response and try again later. To them, your script is looking like just such a badly-behaved client.
The solution, therefore, is to try sending again a few minutes later, however, this is a pain to do in PHP. The right way to do this is to set up a local mail server and send through that - it will accept your message immediately, and deal with the onward delivery itself with no input from you, including any greylisting and other spam countermeasures.