Scenario 1: [Failed]
In the existing DB, created two new collections ParentCollection and ChildCollection and tried creating a relationship attribute on ParentCollection. Attached video.
Scenario 2: [Succeeded]
Created a new DB and repeated steps mentioned in the scenario 1 and it worked.
TL;DR
Developers are unable to select a collection when trying to create a relationship attribute on ParentCollection in an existing DB. However, the issue was resolved by creating a new DB and repeating the same steps.