Introducing recursion and then flattening the result with Saxon. Desire: do section numbering and grouping without using counters. Platform: Saxon 6.5.5

a-input.xml

<?xml version="1.0" encoding="UTF-8"?>
<root>
    <heading>Hello</heading>
    <paragraph>This is my first paragraph</paragraph>
    <paragraph>This is my second paragraph</paragraph>
    <heading>Hello!</heading>
    <heading>HelloOooo!</heading>
    <paragraph>Coolness.</paragraph>
</root>

b-first.xsl

<?xml version="1.0" encoding="UTF-8"?>
<xsl:stylesheet
    xmlns:xsl="http://www.w3.org/1999/XSL/Transform"
    xmlns:saxon="http://icl.com/saxon"
    exclude-result-prefixes="saxon"
    version="1.0">
    <xsl:output indent="yes"/>
    <xsl:template name="numbering">
        <xsl:param name="position"/>
        <xsl:param name="node"/>
        
        <xsl:variable name="next" select="saxon:node-set(($node/following::heading)[1])"/>        
        <section>
            <h1><xsl:value-of select="$position"/>. <xsl:value-of select="."/></h1>
          <xsl:for-each select="saxon:intersection($node/following::paragraph, $next/preceding::paragraph)">
              <p><xsl:value-of select="."/></p>
          </xsl:for-each>
        </section>
          <xsl:if test="$next">
              <xsl:call-template name="numbering">
                  <xsl:with-param name="position" select="$position + 1"/>
                  <xsl:with-param name="node" select="$next"/>
              </xsl:call-template>
          </xsl:if>
    </xsl:template>
    <xsl:template match="/root/heading[1]">
        <document>
    <xsl:call-template name="numbering">
        <xsl:with-param name="position" select="1"/>
        <xsl:with-param name="node" select="saxon:node-set(.)"/>
    </xsl:call-template>
        </document>
    </xsl:template>
    <xsl:template match="text()"></xsl:template>
</xsl:stylesheet>

c-first-result.xml

<?xml version="1.0" encoding="utf-8"?>
<document>
   <section>
      <h1>1. Hello</h1>
      <p>This is my first paragraph</p>
      <p>This is my second paragraph</p>
   </section>
   <section>
      <h1>2. Hello</h1>
   </section>
   <section>
      <h1>3. Hello</h1>
   </section>
</document