Is there some concept of virtual IP for soap services on clustering environment. How does WM clustering handle SOAP service requests in case the server refered in SOAP service is down?
Clustering would treat soap requests just like any other HTTP request, I believe. However, as discussed frequently here, IS clustering is an inferior solution to a decent hardware-based load balancer when dealing with work received via HTTP or FTP.
Review the clustering guide for details, but basically one of the IS instances is designated as the LB instance. All incoming requests are to go to it (the SOAP request should refer to the LB instance). It redirects the request to other instances in the cluster, or possibly to itself. Outages of the instances in the cluster would be transparent to the caller. However, if the LB instance is down, service is unavailable.
Load balancing as a feature provided by IS is deprecated as of v6.5. As Mark points out, you should use an external hardware LB device.