After trial and error I got it working somehow. I don't know if this is the way it should be done but now I can authenticate the caller from remote server instance.
Configuration snippets from standalone.xml which made this happen are:
<remote-outbound-connection name="remote-ejb-connection" outbound-socket-binding-ref="remote-ejb" username="user1" security-realm="MyPasswordRealm">
<property name="SASL_POLICY_NOANONYMOUS" value="false"/>
<property name="SSL_ENABLED" value="false"/>
<property name="SASL_DISALLOWED_MECHANISMS" value="JBOSS-LOCAL-USER"/>
The secret value inside server-identities is the password value encoded with base64. So the Username and password used on authenticating ejb caller are configured on <remote-outbound-connection> using attributes username and security-realm.