This way you can manipulate XSLT using XSLT. A common case is to generate XSLT.

Clearly that would be possible, but I never actually saw anyone doing that though.

Any pointers to tech that did this, if it was a common case?

I doubt it was common. But, for example, there is such thing as Schematron: this is a special notation that checks that an XML document follows business rules and the final tool that it produces is a custom XSLT that transforms the document into the report.

(I'm also doing this currently; I need to prepare a sort of an annotated patch to an XML document, so I concocted a notation that describes edits and use it to generate both the documentation that highlights differences and also the patch itself; the patch comes out as XSLT.)