TCAS has been scabbed onto the old IFF system that became known commercially as the ATC transponder. Until Mode S was adopted in 1987, all transponders were called ATCRaBS, for ATC Rotating Beacon System. The transponder output is always pressure altitude, not baro-corrected. The TCAS processor uses the output from only the transponder that is replying to ATC.
ALTitude selection on the ATC/TCAS control panel is for redundancy, the same reason the plane has dual Air Data Computers and dual transponders, from back when they weren't so reliable. ALT OFF is for when the transponder might be reporting wrong altitude, or when ATC would get overloaded in the early days and request ALT be turned off. Back then, no plane had more than one transponder.
The Aero Peru 757 was a particularly tragic case. It was pressed into service in the middle of the night at Lima while being polished. The polishers neglected to uncover the tape from the static ports, and the walkaround failed to notice. Once they lifted off, none of their air data instruments, and those systems depending on air data, made sense. Indicated airspeed went down as they ascended, while indicated altitude remained at field elevation. They finally lost control over the ocean while trying to sort it out.
ATC would have believed and reported them at field altitude, of course. Some people blamed the crew for incompetency. I defy you to do any better. Nothing makes sense in that situation, and they were IMC. Their only source of speed was the IRU or DME, and they had only indication of field altitude, once above 2500' radio altitude.
Only weeks earlier, the very first 757 crash was a German charter out of a Caribbean island, where the plane had sat for two weeks. They stalled at low altitude due to an air data problem. I don't remember the details.
I don't believe tragedies come in threes, but not too long after, an AA 757 hit a mountain in Colombia by descending too soon. I don't remember another 757 crash since. The 757 has been instrumental in at least one other crash, however, due to its nasty wake on approach.
Back to selecting QNH at top of descent: it doesn't matter, as neither ATC, nor other aircraft will know.
I got involved in a case in about 1992, with a small fleet of 727-100 that flew only LAX-JFK. Sometimes NY ATC would complain they were off their cleared altitude by up to 500', especially during times of high baro pressure. Turned out that the FAA Designated Engineering Representative who designed the retrofit of the Mode S transponder (and TCAS) was unaware the transponder had to have a pressure altitude source and not baro corrected. They had to rewire the airplanes. Last I knew, that guy was still in business.
GB