I have the option turned on under Library settings within the app (version 3.7.5) with iOS v14.7.1 (Latest) to Hide Songs in the Cloud.
When I search for a song the iCloud version appears in the search results grayed out with a cloud icon over the cover art. Toggling the option on/off yields the same results. Looks like a bug to me. Help/guidance/workaround is much appreciated. Thank you.