The correct option is C Several terrorists have been arrested by police.
In newspaper headlines, the auxiliary verbs (helping verbs) are generally omitted, because headlines are designed to be short, in order to attract attention. Hence the English rules used will be slightly different than the normal spoken language.
In the given newspaper headline, the helping verbs have been omitted.
Option B explains the headline, by introducing the helping verbs 'have been'. Hence B is the correct option.
Option A has changed in meaning, compared to the original headline. The headline is in passive voice, where the subject "Terrorists" receives the action "arrested" from the object "police". But, option A has swapped the position of the subject and object, without changing the passive verb form 'has been arrested by'. Hence A is incorrect.
Option C is incorrect because A isn't the correct option.
Similarly, option D is incorrect because the answer lies only in B.