@MyAzQuery Thank you for reaching out to us, As I understand you are trying to add a group managed in on-premise while creating access package.
Synced groups cant be added to access package, hence getting this error message, same has been documented here - https://learn.microsoft.com/en-us/azure/active-directory/governance/entitlement-management-access-package-resources#add-resource-roles:~:text=resource%20role%20sections.-,Add%20a%20group%20or%20team%20resource%20role,-You%20can%20have
Reference: https://www.reddit.com/r/sysadmin/comments/qu5lf9/azure_access_packages_directory_synced_objects/
Let me know if you have any further questions, feel free to post back.
Please remember to "Accept Answer" if answer helped, so that others in the community facing similar issues can easily find the solution.