For now only web.config supports transformation (web projects).
This transformations allow you can have different settings for different configurations (debug or release). A good example is transformation of a connection string. Probably you will have a different connection string when you release the app in production.

Doing the following steps you can obtain transformation on a app.config too.

1. Prepare your project and add app.config, app.debug.config and app.release.config. Make sure is running under .Net 4.0 .

2. Right click on the project, click Unload project and then Edit .csproj.

3. Below the last PropertyGroup add the following:

  <PropertyGroup>
    <ProjectConfigFileName>App.config</ProjectConfigFileName>
  </PropertyGroup>

4. Modify the section ItemGroup that’s related to app.config/app.*.config files

 <ItemGroup>
    <None Include="App.config" />
    <None Include="App.Debug.config">
      <DependentUpon>App.config</DependentUpon>
    </None>
    <None Include="App.Release.config">
      <DependentUpon>App.config</DependentUpon>
    </None>
  </ItemGroup>

5.Below the last Import tag insert this one

<Import Project="$(MSBuildExtensionsPath)\Microsoft\VisualStudio\v10.0\Web\Microsoft.Web.Publishing.targets" />

6.Right before end of Project tag add this

  <Target Name="AfterBuild">
    <TransformXml Source="@(AppConfigWithTargetPath)" Transform="$(ProjectConfigTransformFileName)" Destination="@(AppConfigWithTargetPath->'$(OutDir)%(TargetPath)')" />
  </Target>

7.Now you can save the project, right click the project and choose Reload Project.

8.For app.debug.config / app.release.config files you can use the template that’s provided for web projects, which looks like this below:

<?xml version="1.0"?>

<!-- For more information on using web.config transformation visit http://go.microsoft.com/fwlink/?LinkId=125889 -->

<configuration xmlns:xdt="http://schemas.microsoft.com/XML-Document-Transform">

  <appSettings>
    <add key="Mode" value="Debug" xdt:Transform="Insert"/>
  </appSettings>
  <!--
    In the example below, the "SetAttributes" transform will change the value of 
    "connectionString" to use "ReleaseSQLServer" only when the "Match" locator 
    finds an atrribute "name" that has a value of "MyDB".
    
    <connectionStrings>
      <add name="MyDB" 
        connectionString="Data Source=ReleaseSQLServer;Initial Catalog=MyReleaseDB;Integrated Security=True" 
        xdt:Transform="SetAttributes" xdt:Locator="Match(name)"/>
    </connectionStrings>
  -->
  <system.web>
    <!--
      In the example below, the "Replace" transform will replace the entire 
      <customErrors> section of your web.config file.
      Note that because there is only one customErrors section under the 
      <system.web> node, there is no need to use the "xdt:Locator" attribute.
      
      <customErrors defaultRedirect="GenericError.htm"
        mode="RemoteOnly" xdt:Transform="Replace">
        <error statusCode="500" redirect="InternalError.htm"/>
      </customErrors>
    -->
  </system.web>
</configuration>

Full example of .csproj is here:

<?xml version="1.0" encoding="utf-8"?>
<Project ToolsVersion="4.0" DefaultTargets="Build" xmlns="http://schemas.microsoft.com/developer/msbuild/2003">
  <PropertyGroup>
    <Configuration Condition=" '$(Configuration)' == '' ">Debug</Configuration>
    <Platform Condition=" '$(Platform)' == '' ">x86</Platform>
    <ProductVersion>8.0.30703</ProductVersion>
    <SchemaVersion>2.0</SchemaVersion>
    <ProjectGuid>{BDB79931-AFF6-417E-9DC2-773671C69BF7}</ProjectGuid>
    <OutputType>Exe</OutputType>
    <AppDesignerFolder>Properties</AppDesignerFolder>
    <RootNamespace>AppConfigDebug</RootNamespace>
    <AssemblyName>AppConfigDebug</AssemblyName>
    <TargetFrameworkVersion>v4.0</TargetFrameworkVersion>
    <TargetFrameworkProfile>
    </TargetFrameworkProfile>
    <FileAlignment>512</FileAlignment>
  </PropertyGroup>
  <PropertyGroup Condition=" '$(Configuration)|$(Platform)' == 'Debug|x86' ">
    <PlatformTarget>x86</PlatformTarget>
    <DebugSymbols>true</DebugSymbols>
    <DebugType>full</DebugType>
    <Optimize>false</Optimize>
    <OutputPath>bin\Debug\</OutputPath>
    <DefineConstants>DEBUG;TRACE</DefineConstants>
    <ErrorReport>prompt</ErrorReport>
    <WarningLevel>4</WarningLevel>
  </PropertyGroup>
  <PropertyGroup Condition=" '$(Configuration)|$(Platform)' == 'Release|x86' ">
    <PlatformTarget>x86</PlatformTarget>
    <DebugType>pdbonly</DebugType>
    <Optimize>true</Optimize>
    <OutputPath>bin\Release\</OutputPath>
    <DefineConstants>TRACE</DefineConstants>
    <ErrorReport>prompt</ErrorReport>
    <WarningLevel>4</WarningLevel>
  </PropertyGroup>
  <PropertyGroup>
    <ProjectConfigFileName>App.config</ProjectConfigFileName>
  </PropertyGroup>
  <ItemGroup>
    <Reference Include="System" />
    <Reference Include="System.Core" />
    <Reference Include="System.Xml.Linq" />
    <Reference Include="System.Data.DataSetExtensions" />
    <Reference Include="Microsoft.CSharp" />
    <Reference Include="System.Data" />
    <Reference Include="System.Xml" />
  </ItemGroup>
  <ItemGroup>
    <Compile Include="Program.cs" />
    <Compile Include="Properties\AssemblyInfo.cs" />
  </ItemGroup>
  <ItemGroup>
    <None Include="App.config" />
    <None Include="App.Debug.config">
      <DependentUpon>App.config</DependentUpon>
    </None>
    <None Include="App.Release.config">
      <DependentUpon>App.config</DependentUpon>
    </None>
  </ItemGroup>
  <Import Project="$(MSBuildToolsPath)\Microsoft.CSharp.targets" />
  <Import Project="$(MSBuildExtensionsPath)\Microsoft\VisualStudio\v10.0\Web\Microsoft.Web.Publishing.targets" />
  <!-- To modify your build process, add your task inside one of the targets below and uncomment it. 
       Other similar extension points exist, see Microsoft.Common.targets.
  <Target Name="BeforeBuild">
  </Target>
  <Target Name="AfterBuild">
  </Target>
  -->
  <Target Name="AfterBuild">
    <TransformXml Source="@(AppConfigWithTargetPath)" Transform="$(ProjectConfigTransformFileName)" Destination="@(AppConfigWithTargetPath->'$(OutDir)%(TargetPath)')" />
  </Target>
</Project>