The transponder sends back level information using 1013mb as a datum.
The ATC radar processors have the local QNH information fed in and the software does the calculation and will show your level as an altitude (two digits) if you're flying below the TA in the area or as a flight level (three digits) if you're flying above the TA on the radar display.
Fuji,
We (LTCC) will be using Mode S derived info from the Autumn.
WF.