The application was not working because the proxy settings seem to be cached and it appeared to have some invalid values in the server.
To resolve this we forced the w3wp to hit the remote service by forcing it to not read the cached proxy by setting usesystemdefault=false.
proxy setting in web.Config, now the application working fine
<system.net>
<defaultproxy>
<proxy usesystemdefault="False" />
</defaultproxy>
</system.net>