> If we use <xsl:copy>, input content with comment coming as it 
> is in output XML. But I need Output XML (template applied).

You mean you want to treat the text inside the comments as if it were a tree
of elements?  You can't do that directly. Comments don't contain elements
(or any other nodes). You'll have to put the content of the comment through
an XML parser, which you can do using the saxon:parse() extension function.

Michael Kay