2.1.2 [W3C-XSLT] Section 2.7, Embedding Stylesheets
The specification states:
NOTE: A stylesheet that is embedded in the document to which it is to be applied or that may be included or imported into an stylesheet that is so embedded typically needs to contain a template rule that specifies that xsl:stylesheet elements are to be ignored.
MSXML3 and MSXML6
Embedded style sheets are not supported.