Hi Vishnu
From the screenshot, in the XML declaration, the encoding is not specified, so by default it will be UTF-8 which is causing the problem.
Can you clarify whether the XML from the down stream you provided is before or after you added the XMBWS.XMLEncoding in the SOAP channel?
If you add the parameter correctly, the Content-Type and XML declaration should have the ISO-8859-1 mentioned as shown below:-
I'd also suggest that you try using the following feature to trace the SOAP call. It will help you troubleshoot further if required.
HTTP tracing in SOAP receiver adapters with TraceHTTP module parameter
Rgds
Eng Swee