More like a mercy killing, to my mind. From what I recall, the soul of a person who has their body turned into a vampire does not go anywhere, it is lost, so returning it to the body and then destroying the body at least sets it on its way to where it should have ended up. This may be a wrong recollection; I'm quite tired and may be confusing Buffy mythology with other vampire stuff. Either way, if the vamp in question was a big enough threat to enough people/the world, you'd have to at least consider the possibility of giving them their soul back as a way of making them more killable.
I don't recall anyone ever saying the soul was 'lost', permanently, when they become a vampire - I just took that to mean that the demon doesn't get to twist it into something evil. When Angel tells Buffy that 'the soul is gone', I just assumed that meant that it went where other souls of people who've died in this verse go. (No heaven or hell was ever explicitly mentioned, just 'heavenly dimensions', so this is up for debate.)
There was nothing ever said about a soul lying in limbo. The person, the human, is still dead. A vampire setting up shop in its corpse shouldn't affect the soul. A person has to be dead before a vampire can possess it, meaning the soul is already gone to wherever souls go.
But looking at Angel, he would still rather have the curse than have no curse, knowing the consequences of being un-souled. I completely agree that it shouldn't be performed on any vampire, way better off to just kill them. But when they choose to keep one alive, as they did with Spike, it still seems like a curse would be better than nothing, even if it means doing something unethical.
The problems I have with this issue are two-fold.
Yes, Angel might argue that people would rather have their soul - curse or not - than the idea of a vampire killing people wearing their face. But not everyone who is turned into a vampire is like William, or Drusilla, you know? They're not all nice when they're human. There are some bad people who get sired, like the Gorches - returning their soul won't always make much of a difference and then all that energy is wasted just to kill them anyway.
The other thing is - perfect happiness is different for everyone. Perfect happiness could be something as simple as looking at a rainbow or reading a good book, something innocent that we do every day. Angel - before he knew about the curse - didn't know what his one moment of perfect happiness was going to entail and the same can be said for anyone, even if they know about the curse. I think it would be considered too risky.
In order to be able to do this spell on someone who isn't Angel, I think they would have to find a way to remove the curse part of it.