BizTalkers : I understand that you are using a function app to connect SQL Server and you are getting the error message "Login failed for user '<token-identified principal>'. You have provided access to a newly created user with the name as that of function app.
I assume that you are using System assigned identity and hence you are using the name of the webapp as the issue. In case you are using User assigned identity, the name of the user that you are creating in Azure SQL server should be the name of the identity.
Are you able to get a token from App Service ? If so this isolates that App Service is able to reach out to Azure AD to get a token.
We need to understand why Azure SQL server says login failed for user.
Few things to check at this point is
1. Is connection string valid ?
2. Are we passing token when we make request to Azure Sql server.
3. We need to review the configuration of the user to understand the cause of the issue.