>I am using Sun's transformer javax.xml.transform.Transformer which is the JAXP transformer

Actually that's an interface not a transformation engine: almost all XSLT processors available under Java support that interface. But unless you do anything special, you're probably using the Apache processor, Xalan. This doesn't support XSLT 2.0. For 2.0 support you'll need to install Saxon (which also supports the same JAXP interface)

Michael Kay
http://www.saxonica.com/
Author, XSLT Programmer's Reference and XPath 2.0 Programmer's Reference

This:

"unparsed-text(document-uri(.))"

is finding the URI of the document containing the context node (which is by definition an XML document), and is then rereading the same document but this time without parsing it. I can just about, with a lot of imagination, think of cases where you might want to do that, but I certainly can't relate it to your problem as you described it.

Michael Kay
http://www.saxonica.com/
Author, XSLT Programmer's Reference and XPath 2.0 Programmer's Reference

Simply remove the
<?xml version="1.0"?>
directly start with <xsl:stylesheet version="2.0" xmlns:xsl="http://www.w3.org/1999/XSL/Transform">

I was trying to run this locally with XML and XSL file. The moment i added these in J2EE web app i got the error javax.xml.transform.TransformerException: Syntax error in 'text( )

XSL document i directly started with <xsl:stylesheet the error was gone.