Hi Mani,
Thank you for posting your question in the Microsoft Q&A forum.
Do you add and verify the domain @domain.com in O365?
If you set MX record for domain.com and pointed to on-prem Exchange server, we can try to set domain.com is an internal relay domain on on-prem Exchange and create a Send connector with the address space domain.com and send to EOP. So that, we can relay messages to O365 for the non-existent recipients in this domain for on-prem Exchange server.
You can check these articles for more information about internal relay:
Procedures for accepted domains in Exchange Server | Microsoft Learn
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