Well, there's a whole bunch of extra work being done there. Reading the input document into memory, writing the result to a byte array and then converting it to a String... none of that is necessary. Just give the FileInputStream to the transformer, and send the result to a StringWriter.
But that's irrelevant to your question. Which is, you want the transformer to use XSLT 2.0, correct? Then what you do is to find an XSLT 2.0 product and download it. Follow its instructions on how to get your Java code to use it to do transformations. That's all.
I see that since I posted my reply, you edited your post to mention that you had the OrangeVolt product. But as far as I can see, it isn't an XSLT 2.0 transformer product. In fact to me it looks more like an Eclipse plugin, but at any rate nothing about it mentions XSLT 2.0 at all.
I have OrangeVolt com.orangevolt.eclipse.xslt.feature_1.0.7.zip file.
Now how can I write my own transformer using java code that will use 2.0 processor ?
Orangevolt is an Eclipse plugin. The actual xslt engine is plugable just like the javax.TransformerFactory itself. Since Orangevolt bundles Saxon 8.9, and saxon support xslt 2.0: it is in this sense that you can use xslt 2.0 with Orangevolt plugin to perform xslt.
 To select a xslt 2 transformer, say saxon, you can do it like this. Instead of only this line...
prepare it by setting a property on System and then bring out the factory...
[1.1] Starting in fact from java 1.6 you can do it through the overload of .newInstance() as well - but that is a detail.
 Now what specific factors to link up with Orangevolt? If you install properly the plugin, you will be able to use what being installed and set the classpath to it. Those saxon-related jars will be located in the directory "plugins\com.orangevolt.eclipse.xslt_1.0.7" under Eclipse installation directory. You add those related jars to the classpath for the project and it would be fine.
[2.1] As a side note, to discover all the detail for the classpath pertinent to the plugin, you can run a Orangevolt project and do a simple transformation but with the processor chosen to be Saxon rather than anything else in the Orangevolt "properties" page. From the Console panel, it will show you the classpath the IDE do for the user.
[2.2] In the project documentation, there is a page to show you have to use "your own" xslt engine, just in case. It is in 4.5.1.