Hi @Sahil Kandroo • Thank you for reaching out.
Yes, this is not an expected behavior and it appears to be a problem with the UI. However, I couldn't replicate the issue in my tenant.
As a workaround, you may try searching the user by using the Object ID of the user, while adding servicePrincipal under access policy tab. You can find the object ID under profile page of the user by navigating to Azure Portal > Azure Active Directory > Users > Search the user > Click on the User > Under profile blade, copy the object id of the user.
Feel free to tag me in your reply if you still face the issue.
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