Looking at the error I thought I have not set the proper credentials for my web user. So I rechecked the same by logging as Administrator in the LAN client.
I had the IIS 7.5 reinstalled so that was I my list of suspects. After some more investigation I understood that
1. I must check Windows Authentication checkbox and
2. Set the webDLL user into the Windows ID box.
But no luck. The message was still staring at my face.
The next thing that I found out was that whenever you are using IIS7 first thing you’ll need to do is turn on the IIS6 compatibility for IIS7. To do the same,
1. Go to Add/Remove in Control Panel.
2. Select Windows Features on or off.
3. Below screen will be popped up. Click on the Roles.
4. Then click on the Add Role Services button that will take you to Add New Roles screen.
5. Expand Management Tools.
6. Select the IIS 6 Management Compatibility and IIS Management Console checkboxes and install by clicking on Next button. Trust me it is more difficult to find the sections where you want to set these settings in IIS 7 than IIS 6 or below versions.
7. One more thing you need to adjust is SalesLogix Pool settings which can be found under Application Pools.
8. Make sure that you set Managed pipeline mode to Classic instead of Integrated.
9. In addition to this you need to set SalesLogix Identity pool to Local System instead of ApplicationPoolIdentity by clicking on the Advanced Settings.