Your config file transformation XML structure should match original config file's XML structure.
So in your config you have the element with the name setting
but in your transformation file you have the element with the name add
.
So change your transformation element from add
to setting
and it should work
<?xml version="1.0" encoding="utf-8" ?>
<configuration xmlns:xdt="http://schemas.microsoft.com/XML-Document-Transform">
<userSettings>
<tbp.qa.Properties.Settings>
<setting name="ServiceUri" xdt:Transform="Replace" xdt:Locator="Match(name)">
<value>localhost1</value>
</setting>
</tbp.qa.Properties.Settings>
</userSettings>
</configuration>