Azure Site-To-Site TrafficSelectorPolicy is not working - azure-virtual-network

Question

We are trying to set up a site-to-site VPN on Azure. The problem is that we have a larger virtual network subnet say 10.0.0.0/16 and the VPN should only be able to access 10.0.1.0/24 within that range. We set up the connection and it fails due to "Traffic Selector Mismatch".
I set up the connection from PowerShell as follows:
$ResourceGroup = [SomeResourceGroup]
$Location = [SomeLocation]
$OnsitePublicIp = [onsite public ip]
$OnsiteSubnet = [onsite accessable subnet]
$LocalNetworkGatewayName = [SomeNetworkGatewayName]
$ConnectionName = [SomeConnectionName]
$AzureAddressRange = "10.0.1.0/24"
$VirtualNetworkGatewayName = [SomeVirtualNetworkGatewayName]
$IpSecPolicy = New-AzIpsecPolicy XXXXXXXXXXXXX
$LocalNetworkGateway = New-AzLocalNetworkGateway -Name $LocalNetworkGatewayName -ResourceGroupName $ResourceGroup -Location $Location -GatewayIpAddress $OnsitePublicIp -AddressPrefix $OnsiteSubnet
$IpsecTrafficSelectorPolicies = New-AzIpsecTrafficSelectorPolicy -LocalAddressRange $AzureAddressRange -RemoteAddressRange $OnsiteSubnet
$VirtualNetworkGateway = Get-AzVirtualNetworkGateway -Name $VirtualNetworkGatewayName -ResourceGroupName $ResourceGroup
New-AzVirtualNetworkGatewayConnection -Name $ConnectionName -ResourceGroupName $ResourceGroup -VirtualNetworkGateway1 $VirtualNetworkGateway -LocalNetworkGateway2 $LocalNetworkGateway -Location $Location -ConnectionType IPsec -UsePolicyBasedTrafficSelectors $True -IpsecPolicies $IpSecPolicy -SharedKey $SharedKey -TrafficSelectorPolicy $IpsecTrafficSelectorPolicies
The connection is still rejected and after running troubleshooting on the connection i see the full range is still being referenced.
Proposed Traffic Selector payload will be- [Tsid 4e4 , ]Number of TSIs 1: StartAddress 10.0.0.0 EndAddress 10.0.255.255 ......
We have multiple setups on the gateway appliance and they work as expected, however this one does not work due to the "Traffic Selector Mismatch".
Should the Traffic Selector Policy not have filtered the published range to 10.0.1.0 to 10.0.1.255?
I will appreciate any help to get this sorted out. Am I approaching this issue completely incorrectly? Is there a better way of doing this?