Function or template is not child of stylesheet

An xsl:function or xsl:template declares a component of the stylesheet, and a component belongs where the processor looks for one: at the top level, as a child of xsl:stylesheet or xsl:transform. One buried inside another instruction is never reached, because a template body is a sequence constructor and a declaration is not an instruction it can hold.

XSLT 3.0 gives it one other home. Inside an xsl:override under xsl:use-package, a template or function is the component that replaces the one the used package declares, and that is the only place an overriding component may stand. Those are left alone.

Incorrect:

<xsl:stylesheet xmlns:xsl="http://www.w3.org/1999/XSL/Transform" version="2.0">
  <xsl:template match="chapter">
    <xsl:function name="my:depth" as="xs:integer">
      <xsl:sequence select="1"/>
    </xsl:function>
  </xsl:template>
</xsl:stylesheet>

Correct:

<xsl:stylesheet xmlns:xsl="http://www.w3.org/1999/XSL/Transform" version="2.0">
  <xsl:template match="chapter">
    <xsl:value-of select="my:depth(.)"/>
  </xsl:template>
  <xsl:function name="my:depth" as="xs:integer">
    <xsl:sequence select="1"/>
  </xsl:function>
</xsl:stylesheet>