My question is how to create a web service on android device & host it on the mobile device.
I don’t want to access an already created webservice deployed on a server; I want to create a webservice that returns json/xml & host it on mobile.
RESTful Web Services Implementations in Mobile Devices says it’s doable for Java-based mobile devices, so I think it can be done for Android too.
There is one problem with your setup and mobile devices: mobile networks (wifi and 3g) mostly use NAT, which prevents inbound connections. This makes mobile devices inaccessible from the internet (inbound) while they can still initiate outbound connections. For this reason mobile devices mostly do not host servers.