Xml/Xslt - XML Exception: Data at the root level is invalid. Line 1, position 1

depends on which parser you're using.
Some parsers do not allow white spaces in the beginning of xmls.
Another option is the file encoding, are you parsing a file or a text string ?

Hi I am using UTF  8 encoding and i am parsing xml in the form of a string.

Did you try and see the string value in the debugger ?
I would also try calling trim on the xml string before parsing - likely this will solve the issue.
if you'd like you can send me the code and file and I'll see what's the exact issues.