Hi John_P,
The sad fact is that terms like this will mean different things to different BAs in different organisations. Welcome to my world of frustration with Business Analysis: anyone (IN BA land) can declare anything to be anything and there is no mandatory framework for telling them they are wrong.
Some people band together some of the time and agree certain terms and their usage (e.g. IIBA BABOK, Agile, UML, blah blah blah). These fads and fashions in BA come and go. I've written and ranted quite a lot about this - the underlying problem seems to be that there is no mandatory or empiric set of drivers that result in the need for a common set of terms and usage.
That doesn't help you (or me!). My answer has been to define what I need in order to do business analysis in such a way that
1. the suppliers of my BA information and the users of it (customers of it) agree that the terms and usage make sense and work in documenting the change requirements.
2. I can 'prove' the Business Analysis is correct in the context of the terms and usage I am using.
This works for me and I have been able to do a lot of Business Analysis quite successfully with this approach never having to worry too much about which BA guru/latest trend says what terminology I must use and how. It also allows me to quite happily go for any job using any methodology on the grounds that so long as conditions 1 and 2 are satisfied I don't care what certain things are called or how they are used.
Bottom line (almost literally!): you should define the terms Business Service and Business Capability in such a way that conditions 1 and 2 are satisified and use them as much as you need in order to do your analysis.
I hope that helps.
Guy