The issue got resolved by changing to xsl:output method="xml" which was initially xsl:output method="html".But I still wonder  how it worked with Saxon8.4.

As I explained, this was a change made in Saxon to implement a W3C decision. Saxon 8.4 came out long before the XSLT 2.0 specification was finalized, and there were many changes made to the product as the W3C specification evolved.

Michael Kay
Saxonica