Going by basic statistics and common sense, I think a two sigma process should be better than six sigma process because it will be closer to mean and have less deviation. The number of defects in a six sigma process are less because we have taken a huge range around the mean for consideration as compared to two sigma deviation. For example if diameter of a pipe should be 3.50 cm then the two sigma process would have range of 3.49 to 3.51 as compared to 3.46 to 3.54 in case of six sigma. Aren't we performing better when we are more close to the standard of 3.50 which is two sigma in this case?
I know I am wrong here and but what is it that I am missing ?

You're worrying about the wrong error.
You'll never get a 3.5 cm pipe. A real pipe has an irrational diameter that varies depending on where you measure it. In fact, its impossible to say "the diameter is ___". We can, however, say "the diameter isn't ___". As in hypothesis testing, we hope for a process that minimizes the size of the set of "the diameter isn't 3.5 cms" pipes. This size of set error, not the difference from 3.5 cm, is the important error.
By assumption, regardless of process, all the pipes' diameters are normally distributed. We want to get a set of pipes that are 3.5 cm, give or take. The two sigma process throws away many more mistakes than the six sigma process.
Edit: its worth underlining lonza leggiera and almagest’s point: it makes the most sense to compare processes with the same fixed tolerance. The 2-sigma and 6-sigma processes have different distributions/sigmas.