Derive Tangent Basis causes faceting

Hi folks,

Using the derive tangent basis creates this weird faceting effect on the mesh. why?

The mesh has almost identical uv sets, except oriented and scaled differently.

I checked the smoothing groups - no hard edges. Exported with tangent space enabled (Blender 4.3). Made sure to uncheck the recompute tangents option on import.

Nothing seems to work and I kind of hit a dead end.

I also attached the mesh along with the texture if you feel like checking on your side.

peg.rar (12.7 MB)