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To use Reporting Service integrated with SharePoint, where to install Reporting Service?

Suppose that SharePoint env. has two physcical servers: application and database server.

Should reporting service be installed On the application server? or On the database server?

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It doesnt matter. However you must install the reporting services addon for SharePoint on the WFE (Front-End Server) if you want to use the "SharePoint integrated mode". You can find more infos here

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SSRS itself must be installed on a SharePoint Server, not your Database Engine server (unless it also has SharePoint installed on it, which isn't advisable).

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