Let's say your mod made it so that when you tried to use your grab, you used an Almighty Push. So, if you and I were to play a Singles player match, I picked Pain and you picked Itachi, but you had a mod for Itachi installed, the game will read your modded moveset (the prm file) for your game, but read my unmodded Itachi moveset on mine. If you modified your files, the moment there's a difference between your game and your opponents game, it'll cause a transmission error.
The way the game works is that it'll read certain files from each player and the game will function with those files in mind. You cannot use mods online unless both players have the same mod installed.