First, one point of confusion: It does indeed sound like you're using a Disk Image backup, even though you're in the Files and Folder Backup section. Can you confirm that so we know which backup type we're talking about? For future reference though, you can access the homepage of these forums by just going to http://forum.macrium.com.
From there you'll be able to find the appropriate sub-section, and when you're in any such section, toward the upper-left area of the page you'll find a left-to-right drill-down style bar showing where you are. For example, as I write this post mine says Home > Reflect V6 > File and Folder Backup > File and Folder Backups Not Happening > Update Post. I could click on any of those to jump "out" to the desired section.
Second, you said that you selected your OS partition for backup and then said you're confused as to why it's backing up your C drive. Well assuming your OS is on your C drive like it is in almost all cases of Windows installations, it's backing up your C drive because you told it to when you selected your OS partition for backup, and since the OS files are constantly changing while the OS is running (log entries being generated, for example), you're always going to have changes there for an Incremental backup to capture.
Third, you shouldn't have a Full and Incremental job scheduled for the same day. The proper way to configure the schedule is to set a Full to run on a Weekly schedule, then select the particular day you want it to run. Then add a new schedule selecting Incremental as the backup type, set it to Weekly, and check all days EXCEPT the day the Full runs. That will get you the schedule you're looking for.
To answer your question about XML files, they ARE the backup definition files; those are one and the same. The Backup Definition Files tab within Reflect merely shows the ones that Reflect knows about from you having configured them on that system. They store the configuration of the job, e.g. what files/partitions get backed up, whether to use encryption/compression, what the retention rules are, etc. They should be stored on the local system (not with the backups themselves) because the way the scheduling aspect works is that Reflect creates a Scheduled Task in Windows based on your scheduling selections that basically says, "Run the Reflect job described in this XML file."
If you want to back up M as a separate File and Folder backup, you can do so, in which case make sure the image backup does NOT contain your M drive, and then set a File and Folder backup for all of M. That would allow you to set different backup schedules and types for each if you desire. I do that myself because I wanted a way to restore individual files from my Data partition in a way that preserved their original NTFS permissions, which isn't as easy extracting files from an image backup.
Lastly, if you find Reflect mystifying, I would strongly encourage you to read their online manual and Knowledge Base articles, as they are excellent. Reflect is a very capable application, but if you've never worked with backup programs that have these kinds of options before (as opposed to applications that just sync changes from A to B), there is a bit of a learning curve -- but again, Macrium has done an outstanding job with their documentation. Good luck!