Words with ह in the middle or the end are exceptions to phonetic pronunciation in Hindi. When the ह is sandwiched between अ on either side (For example, in शहर it is between the अ attached to श and the one attached to ह), both those अs are pronounced as 'e'. The 'e' sound is similar to the 'e' in 'bed'. This is a quirk of spoken Hindi and this sound is formally absent in written Hindi though Devanagari represents it as ऎ (shorter version of ए) for use in other Indic languages.
You can see this pronunciation in many words like बहन(sister), कहना(to say), पहन(wear) etc. If the ह is at the end of the word where the last अ would not normally be pronounced (like छह-six), you leave out the last 'e' sound too. So, छह is pronounced 'cheh'.
There was a good and detailed post on this forum about how the letter ह often messes with phonetic pronunciation in Hindi but I'm unable to find it at the moment.
It's an English sentence. But only in the rare assumption that there are just a few cities to choose from. If I said "London, Paris, and Delhi are capital cities, but only one is in Asia. Which city is there?" That would be proper and fluent English. The problem here is the subtle difference between "which" and "what" in English. However, without that context of a limited set of possible choices, the question "Which city is there?" is confusing to a native speaker. "Which" serves as a demand to choose from the three proffered options. Without first including those options (the context) the question seems slightly off or non-sensical to a native speaker.
As I anticipated when seeing the original English version of this sentence, one has to remember the literal translation, which doesn't make much sense in English. 'What city is that?", which is what an English person would say, is not accepted. One of the quirks of having English translations done by non-native English speakers. But fair enough - it's a free programme.
'What city is that?' is not a good fit for 'वहाँ कौनसा शहर है?'. That would be ''वह कौनसा शहर है?'
वहाँ कौनसा शहर है? is more along the lines of 'Which city is in that place?'/'Which city lies there?'.
A: क्या तुम्हें पता है कि थार के बीचोंबीच एक हवाई अड्डा है? (Do you know that there is an airport right in the middle of the Thar desert?)
B: अच्छा? वहाँ कौनसा शहर है? (Really? Which city is there?)