I have created the app id with APNS enabled and I configured both development and production certificate
Now when I create entitlements it is always displaying developme
There is a known bug in Xcode whereby manually setting this to 'production' causes Xcode to display an error next to your entitlements config with a 'Fix Issue' button. Clicking this sets it back to 'development' This is not intended functionality. As I said it is a known issue and I believe I filed a radar when I first discovered it.
It has been fixed in Xcode 8.3 beta 2. In the meantime, manually set it to 'production' and then ignore the error Xcode gives you, your project will work just fine.