You confuse the features of the desk top application SSMS with SQL Server.  SSMS != SQLServer.
Most, if not all, Relational Database Managers return row-sets formatted according to a protocol standard such as TDS for MS SQL Server.

The desktop applications SSMS displays that row-set in one of several formats depending on the user's chosen settings.  Other applications, (e.g. SQLCMD, OSQL, BCP, custom web pages, ...) display the row-set in different formats.

When your query tells the server to format the output as an XML string that is what it returns.  That XML string will then be formatted for display by the application (SSMS, a Web Page, WinForm, etc.)

It is important to be clear about the relationship and features of the various clients as opposed to the server itself.