Not quite. If the server is not using MAGIC_IFF, then it's custom IFF, but only between JF-17 MP players.
Custom IFF requires mode and code matching to be able to recognise friendly contacts.
For example if you set INT to Mode 2 with code 7777, and your buddy set TRS to the same, then you can see him as friendly (green).
If he set TRS to Mode 2 with code 7776, then you see him as a red contact.
If he set TRS to other modes, you'll get no response from his transponder and will see him as unknown (yellow).