I was struggling with that today in Xcode 8 GM. After disabling the setting, deleting my developer portal provisioning profile and regenerating it and enabling the setting again, I was able to eliminate the warning in Xcode. Keep in mind that I didn’t fiddle with the entitlements file. I left it at development environment and after archiving I got the correct aps-environment setting (production).
Seems Xcode is stilly very buggy tho even in GM