Is it possible to change the HTTP status code returned when proxy_pass gateway is down in nginx?

I think you will have to set up a specific error page, however you can achieve what you're looking for if you do. Try this:

location / {
    proxy_pass http://backend;
    proxy_intercept_errors on;
    error_page 502 503 504 =503 @proxyisdown; # always reply with 503
}

location @proxyisdown {
    add_header Retry-After 500 always;
    index my_pretty_error_page.html; 
}

If you work it this way you should be able to return the 503 (that's the =503 part of the error_page directive) and retry-after headers with the benefit that your visitors will receive a nicely formatted "oops, we're currently experiencing problems, try again in a few minutes" page rather than a blank "503 you don't really know what this means" page. :)

Name your error page /500.html and:

error_page 400 404 500 502 504 =503 /500.html;

# Optional if your public root is set above and the same for error pages,
# I sometimes please them outside the app, which is why I'm including it.
location /500.html {
  root /path/to/public;
}

Should work as well and seems a bit simpler to me. Note: it doesn't support the Header either.