This oft repeated phrase is one of the prime methods of teaching in the Ch'an or Zen school of Buddhism. It refers to the fact that the central teaching of Zen Buddhism is not something that can be expressed with rote learning of doctrine or formula, or even through sophisticated dialectical reasoning. The understanding of the teaching of Bodhidharma and Lin-chi can only be understood through direct intuition and experience.
The problem with this oft repeated phrase, or even with people who truly understand the concept, is that they mistake the method of teaching (intuition) with the actual business being taught (enlightenment, for lack of a better term). This has caused some confusion in "Western" circles, although doubtlessly in Zhongguo, even at the height of Zen activity there, it was a matter of confusion. Many Westerners in the new age movement and other such schools of thought take the central teaching of Zen to be that if people can reject scientific or logical thought, and depend on their magically expansive intuitive mind, that they will automatically reach enlightenment (or rather that depending on intuition is enlightenment).
The problem with this is that there are a great many things that can be understood through intuition. The commutative law of arithmetic. How hungry you are right now. That a circle is a continuum of points all the same distance from one point. How those people over their really want to kick your ass because you scoped out their girls. And how that really pretty woman over there is checking you out (which brings up another problem with intuition-it is sometimes hard to tell the difference between it and wishful thinking). All of these things are things that are intuitivly grasped, and yet they are not exactly enlightenment.
If the purpose of Zen Buddhism was to teach intuitive thinking, it would have not been such an important school in China. After all, Daoism taught a great deal of intuitive thinking already. Confucius also taught intuitive thinking when he said: "I will not talk about Ren ", meaning his conception of humane behavior was beyond words. All of these things were well known in China at the time, people did not have to go into a monastary and meditate for ten hard years to learn the secret of intuitive thinking.
As for what the direct transmission is, I don't know. But I am fairly certain it is more then learning how to reject logical or pragmatic truth.