Firstly, you need to import your flat file definitions into PowerCenter and then into TDM. And when you create a plan for subsetting or masking and use this data source, the source is automatically selected as a flat-file. And for the target, you can select whichever you want either a relational or flat-file. Note that, both the source and target file locations are mapped to the $PMSourceDir and $PMTargetDir folders that are configured in the Integration Service. There is no need for new flat-file connections to be created within TDM.
Hope this helps!
Harsha...Thanks for your reply..It worked !