With the handles in Bypass there is no water being pushed through the attached equipment. The equipment is isolated. While in bypass mode the attached equipment can be detached from the bypass valve and worked on (but it needs to be depressurized first). The bypass valve can be left attached to the household plumbing to allow water to flow.
With the handles positioned In Service water is being pushed through the attached equipment and being treated. This is the "normal" orientation of the bypass valve.
The diagram below is produced by Clack and shows all of the potential valve positions and what they're used for:
