This is a very good question that deserves a thorough answer. The OP has spotted a murky wording in the celebrated textbook of M.P. do Carmo "Riemannian geometry" on page 126 where is is said that $B(X,Y) = \overline{\nabla}_{\overline{X}} \overline{Y} - \nabla_X Y$
is a local vector field on $\overline{M}$ normal to $M$.
I guess that this causes problems in understanding because a local vector field on $\overline{M}$ is supposed to be defined on an open subset of $\overline{M}$, but $B(X,Y)$ is well defined only at each point $p \in M$, and as a whole $B$ is a bi-linear operator on $TM$ with values in $(T_p M)^{\perp}$.
Maybe, it would be better to say, that at each point $p$ and for any two tangent to $M$ vector fields $X$ and $Y$ we can find local extensions $\overline{X}$ and $\overline{Y}$ of the fields $X$ and $Y$ respectively, and an extension $\overline{\nabla_X Y}$ of the tangent to $M$ vector field $\nabla_X Y$, and then form a vector field $\overline{B}(\overline{X},\overline{Y},\overline{\nabla_X Y})$ on an open subset $\overline{U}$ of $\overline{M}$ containing the point $p$ defined by the equation
$$
\overline{B}(\overline{X},\overline{Y},\overline{\nabla_X Y}) := \overline{\nabla}_{\overline{X}} \overline{Y} - \overline{\nabla_X Y}
$$
Of course, $\overline{B}(\overline{X},\overline{Y},\overline{\nabla_X Y})$ heavily depends on extensions, but only away from the manifold $M$.
Fact. At each point $p \in M$ $$ B(X,Y)|_p := \overline{B}(\overline{X},\overline{Y},\overline{\nabla_X Y})|_p $$ does not depend on a
choice of extensions for the tangent to $M$ vector fields $X$, $Y$ and
$\nabla_X Y$.
With each choice of tangent to $M$ vector fields $X$ and $Y$ we obtain $B(X,Y)$ as a vector field along $M$ (or, along the immersion $f$, if you like).
Not a local vector field on $\overline{M}$...
Edit. A friend of mine just has pointed to me that OP also misinterprets the notion of extension.
Definition. A vector field $\overline{X}$ on $\overline{M}$ is an extension of a vector field $X$ on $M$ if and only if $\overline{X} = X$ at all points of $M$.
In other words, the normal component $(\overline{X})^{\perp}$ vanishes along $M$.
Yet another way to say that, the choices of $X^{\perp}$ are not arbitrary along $M$, in fact $X^{\perp}$ must vanish for $\overline{X}$ to be an extension of $X$.
This is "why".