Transponder derived altitude.
 

Working Farnborough Radar last week, the controller asked me a few times to double check my altitude and QNH set. I was cruising at 2,700ft, but the controller informed me that I was indicating 2,400ft. The aircraft (PA28) had dual altimeters, both set to the QNH of 1025 and were both indicating 2,700; the GTX330 transponder was showing FL023.

1025-1013=12
x30 = 360
2,700-360 = 2,340

FL023 would appear to be about right. My understanding is that the transponder sends ALT info based on the aircraft's pressure altitude and then the ATC equipment converts this information based on the reported QNH. Where could this discrepancy have arisen from, could there be a fault with the equipment on the aircraft?

Yes, Transponders send out pressure altitude and the pilot's guide says so too. While the aircraft has dual altimeters, what is the encoder source for the transponder?

True, the transponder sends out the raw baro data, ie pressure altitude (29.92" uncorrected if that is the proper term here) Both the ac and ATC systems correct this respectively with local.