When i check the disable condition, it is 

TempProcess.pyStructureType != 'Single' || TempProcess.pyCheckedOutOrLocked!= ''

I have removed the condition for now. Any idea or thoughts on the issue?

Okay got the issue here. You can only change a step type if it is a single step and the related process is in unlocked ruleset or in your private checkout.

Reason being, Pega want to restrict any changes to the step once it has been determined initially.

(i.e.) When u create a step it gets defaulted to single step. And only that time you can change the step type.

It gives a disclaimer 'Changing step type will replace the current configuration and is not reversible.' So if you want to change it afterwards, either you have to create a new step and delete old one or you can remove the disable condition under private checkout ( same way i tried but not advisable )