This has been nicely explained in a friends blog. Below is the description.

The first question arises , why we need XSLT transformation, so here are some reasons -
- Suppose sometime we have the data in XML file but we want to present it in different ways depending on its contents.
- Or we need to read data of a email template from a file and email needs to be with colors, tables and more HTML look.
- Or when our email data is coming from different BCs or calculations in a Business Service, or Property Sets, and we are not able to use Siebel …