I believe you perform intra-document sort (sort nodes within a document). You have one SerialNo element per Item element. That is why Tamino does not sort anything.
To sort documents you should use sort clause immediately after a root node.
I think this one will work
Item sortby (SerialNo)/SerialNo
By the way, why do all the documents have the same ino:id?
Good Luck
#API-Management#webMethods#Tamino