Either

<xsl:template match="B">
  <xsl:apply-templates select="C">
    <xsl:with-param name="match_number" select="position()"/>
  </xsl:apply-templates>
</xsl:template>

<xsl:template match="C">
  <xsl:param name="match_number"/>
  <xsl:value-of select="$match_number"/>
</xsl:template>

This one did not work, only outputs 0's. Then I changed to
call-template instead, and it worked. The one below however
works like a charm - thank you very much.

<xsl:template match="C">
  <xsl:value-of select="count(../preceding-sibling::B) + 1"/>
</xsl:template>