The transmission is connected to the rear of the engine then the transfer case is attached to that, by putting the transfer case in neutral it eliminates the transmission from the equation. If in two wheel drive the transfer case supplies power to
rear wheels, four wheel drive both front and rear. Nuetral it allows the driveshafts to turn but that's it. There is a device, a coupler, that you can put on a drive shaft to stop the shaft from turning the transmission, a transfer case is simply
that coupler.