@Ashwini Gaikwad - I'm glad that you were able to resolve your issue and thank you for posting your solution so that others experiencing the same thing can easily reference this! Since the Microsoft Q&A community has a policy that "The question author cannot accept their own answer. They can only accept answers by others ", I'll repost your solution in case you'd like to accept the answer .
Ask: Azure Databricks authentication to Azure SQL database with service principal
Solution: We figured out that the issue is with version of dq_library wheel file which we are building and not with sql connection file. Service principal authentication works fine.
If I missed anything please let me know and I'd be happy to add it to my answer, or feel free to comment below with any additional information.
If you have any other questions, please let me know. Thank you again for your time and patience throughout this issue.
Please don’t forget to Accept Answer
and Yes
for "was this answer helpful" wherever the information provided helps you, this can be beneficial to other community members.