Hello Shreeram,
802.1ah (also known as QinQ) is a VLAN tunneling technique that mostly designed for pure L2 environments. Normally you wouldn't run it inside a MPLS service but as a solution to provide a L2VPN with devices that do not support MPLS.
With that said, it is possible to run 802.1ah in the access domain of the provider (which is a pure L2 setup in most cases) and MPLS-enabled services in the core:
If you will analyze the forwarding plane, customer traffic tagged with C-VLAN (customer VLAN) will get encapsulated with a second provider/service VLAN (S-VLAN) to uniquly identify the service in the access/L2 domain. The traffic can then be mapped into a L2 circuit (such as E-Line or E-LAN) when it hits the provider edge, where two MPLS labels will be used in most cases: one (inner) to identify the service (VC label) and another one (topmost) to identify the remote PE (Tunnel/Transport label). In the remote side, the MPLS labels will be stripped at the destination PE, and the S-VLAN will then be removed. From the customer point of view, the frames are getting from one side to the other untouched.
Hope I answered your question,
Nir
