NETWORK SERVICE and LocalSystem will authenticate themselves always as the correpsonding account locally (builtin\network service and builtin\system) but both will authenticate as the machine account remotely.

If you see a failure like Login failed for user 'DOMAIN\MACHINENAME$' it means that a process running as NETWORK SERVICE or as LocalSystem has accessed a remote resource, has authenticated itself as the machine account and was denied authorization.

Typical example would be an ASP application running in an app pool set to use NETWORK SERVICE credential and connecting to a remote SQL Server: the app pool will authenticate as the machine running the app pool, and is this machine account that needs to be granted access.

When access is denied to a machine account, then access must be granted to the machine account. If the server refuses to login ‘DOMAIN\MACHINE$’, then you must grant login rights to ‘DOMAIN\MACHINE$’ not to NETWORK SERVICE. Granting access to NETWORK SERVICE would allow a local process running as NETWORK SERVICE to connect, not a remote one, since the remote one will authenticate as, you guessed, DOMAIN\MACHINE$.

If you expect the asp application to connect to the remote SQL Server as a SQL login and you get exceptions about DOMAIN\MACHINE$ it means you use Integrated Security in the connection string. If this is unexpected, it means you screwed up the connection strings you use.

Source

If the error still appearing try the below by adding it in the web.config

<system.web>

<identity impersonate=”true” />

</system.web>