After doing a lot of debugging, log levels, tcpdump and wireshark, reminded me of make file space issue, apparently my test client was submitting a url with a space at the end and WSO2 was responding back with a 202 for that, once it was discovered and space at end was removed, everything worked as expected.
Disappointed on myself but also on wso2 esb for not responding correctly, it should have responded like 'can't find the proxy service' or something like that.