marciovp : You make a lot of unverified assumptions in your reasoning . Just to take one :
ATC could not think that it was just a transponder issue. There was clearly in the screen that the transponder was not working and the 360Z360 reading was not reliable (that is what th Z means).
The " clearly" is what is most probably lacking in this ATC system. . How often a normal lack of Mode C interrogation return will provide a Z ? 10 times a day ? 100 times a day ? Is it a bright flashing letter coming on the screen if the Z remains for more than let's say , 3 returns , or 3 minutes...?
Is the radar coverage over Brasilia 100% ? , how does the ATC system behaves when the aircraft enters a zone of bad radar detection ?, puts another Z ?
Replacing Mode C/S altitude by the average altitude of a Military height finder is also something unheard of . All these are contributing factors.
The Brazilian ATC system has unique features that no one else in the world is using .Some are softly saying they are , " prone to Human errors" , some other are bluntly saying they are " dangerous" .If you combine this to poorly trained and poorly paid operators, ( compared to the rest of the world gain ) you might have a different perspective .
On the cockpit side, the same reasoning can apply.For instance a small difficult to spot TCAS OFF in white on a corner of a display while keeping the TCAS map/display unchanged is not what you would normally expect from a modern avionic suite .