When I run, an XSL stylesheet test1.xsl using XML document test1.xml
as an input, I get following results with Saxon,

XTSE3000 B Cannot find package http://package2 (version 1.0.0)
Cannot find package http://package2 (version 1.0.0)

Can anyone, please find an error and let us know, with how I'm using
XSLT and Saxon XSL processor?

Mukul, do you know about (for Saxon 10 EE) -lib:filenames command line
option? See
https://www.saxonica.com/html/documentation10/using-xsl/commandline/index.htm
l

A list of filenames containing library packages. The filenames are
separated by ";" on Windows systems, or ":" on Linux and Mac. Each
filename must identify either (a) a top-level module in a source XSLT
package, or (b) a SEF file containing an exported library package. There
is no constraint on the order of the packages.