Yes you can represent a Windows Service on the Application Diagram. For this, add the Windows Component from the Toolbox. Select this on the Diagram and from the Property grid window, change the Template to "Windows Service". The other available Templates are Windows Application (which is the default) and Console Application.
Thanks,
Jyothi
When you implement the diagram, it will create the projects for you. By specifiying the type on the application, the correct project type is created for you.