So I need to build an application that will receive xml request and based on that I will have to return the response xml. I know how to send requests and receive the response, b
All you have to do on the receiving end is create a 'normal' PHP script. Depending on the protocol between your endpoint and the requesting service you need to grab the data from the correct location which is most likely going to be a $_GET or $_POST array.
You may have to read the raw POST data if it's not coming through in $_POST, take a peak at this article
http://www.codediesel.com/php/reading-raw-post-data-in-php/