Hi Aman,
Assumption: Your SUT and Live System are using an encoding other than UTF-8.
If your live system is responding with an encoding other than UTF-8, try adding a response side DPH (Recording Tab) during recording that converts the live response to UTF-8. In the Playback tab on the response side DPH, add logic to convert from UTF-8 (VSI view) back to the encoded format expected by the SUT.
Be aware that if for some reason the XML is invalid, DevTest might consider marking the response as binary. There are times when an exception will cause the recorder to abort without creating a VSM/VSI. But, it is also possible that an exception is thrown and the recorder goes ahead and completes the recording. In your case, it is a good idea to check the log files (Workstation.log) for exceptions during the recording -- just in case there is another issue creating the resulting binary format.