Apology for the late replay.
The problem has been resolved after it has been escalated to VMware.
Cause: We saw in the logs each 1-3ms connection loss to the iSCSI target.
Resolution: Upgraded to the latest SAN software revision and all problems have been resolved. We do get about 40-50MB/s iSCSI backups speed in production times (Virtual Appliance mode) to an CIFS target.
Need to mention how good VMware is. Even with connection drops we did not experience any problems during production times. Well done VMware.
Thank you for all your support. If there are any queries let me know.