I have WiX 3.6 (Oct 2011) installer for my application. My application requires another service to be installed in the system. I added an MSI file to my installer this way:<
You cannot install one MSI from another MSI. What you need to do is create a bootstrapper (link appears dead now, possible suitable replacement link) that installs each MSI in sequence. Wix 3.6 has a built-in bootstrapper called Burn.
Here is another helpful link, courtesy of Matt Clarkson.
Make sure you are using Burn: http://robmensching.com/blog/posts/2009/7/14/Lets-talk-about-Burn
An MSI cannot include another MSI, so you should also get an EXE file. Make sure you launch the installation through that EXE