I was in Dallas last week and working on a release of which i was not supposed to be part of it initially and then working on a Silverlight contest (still working.) btw, you too can take part in the Silverlight contest by Microsoft here -
Regardless, working little bit more on web services i figured that it is absolutely ok to pass XMl as a set of string data through .net web service.
Also, i found this interesting simple article on how to upload XML or for that matter any file onto server - http://www.c-sharpcorner.com/UploadFile/scottlysle/UploadwithCSharpWS05032007121259PM/UploadwithCSharpWS.aspx
HTH, Thanks - Dipesh