The behavior that you are experiencing is due to the fact that you've specified serverFiltering: true. If set to true the data source will leave the filtering implementation to the remote service. In your case the remote service is the xml file which cannot process the filter expression and transform the result set.
I suggest you to set serverFiltering to false instead as any other server operation(paging, sorting, etc.) as it will have effect for xml file.
the Telerik team
Join us on our journey to create the world's most complete HTML 5 UI Framework - download Kendo UI