Problem solved after several days!
I had configured FastCGI application on my IIS server to run PHP. So it was not working.
I switched to ISAPI Extension PHP version 5.2.17 and it started working.
The funny part is I already had QA website running successfully on FastCGI.
Setting up a new QA website on new database doesn't work on FastCGI. So switched to ISAPI Extension.
Update: The database (tables) was created after switching to ISAPI. But then installation showed blank page when creating Super Administrator. So I again switched back to FastCGI. This time it succeeded.
Summary: On IIS we need to switch to ISAPI to create tables and switch back to FastCGI to proceed further with whole setup.