No, that's not how you would use Instr. You have to open both file before you can test the xml file's contents with Instr. For example, to test each image from your "ImageNames.txt" file:
Code:
Dim I As Long
With #hFile
For I = 0 To UBound(Split(sRegImageFile, vbCr))
If InStr(.Text, Split(sRegImageFile, vbCr)(I)) = 0 Then
'The image name isn't present, so add it.
'Your code to add the image goes here
End If
Next
End With