When you try to package up a solution that includes SmartObjects that depend on a Salesforce Service Instance, that instance does not appear as an option and it's not dynamically included in the package.
It doesn't need to add Salesforce Service Instance when creating a package using MMC, but SalesForce Service Instance should exist on the target environment.
1. Create a package without SalesForce service instance.
2. You will need to have a SalesForce ready target environment. If not, manually add SalesForce Service Instance and generate SmartObject/SmartObjects.
3. Deploy the package to the target environment, which will give missing reference errors.
4. Next you will need to click on the missing reference SmartObject and configure.
5. Select Use Existing SmartObject from the Action drop-down and select the path for the SmartObject created on the target environment.