The process is you have to complete the order first by creating shipment since the order product consider delivered to customer. Then you create a credit memo to refund the shipping fees offline to customer as store credits.
You can follow the below guide on this
Step 1: Click the Ship button to create shipment to complete the order
Step 2: Leave the tracking info blank and click Submit Shipment
Step 3: When order status is complete, click Credit Memo to refund the shipping fees
Step 4: Click Ok button to proceed
Step 5: Update all the products quantity to 0 then click Update Qty's button. Once updated, make sure subtotal value is 0 and refund to store credit amount is same with refund shipping amount then click Refund Offline button.
