Well, they escalated the claim. So I contacted ebay again and was advised not to worry as they had asked the buyer to return the item and if it isn't received or it is received in different condition to what it was sent, then they won't be refunded. I asked them how they would know if it is in different condition or not and it would be a matter of he said she said and they would probably side with the buyer. They assured me that they have experienced people that are able to review this matter and not to worry....yea sure.

Then I got a message from paypal....they had lodged a claim with paypal. So I contacted ebay again and was told it was now out of their hands, but not to worry as they are sure paypal have experienced people to help me.

I contacted paypal and explained the situation to them. I also added that if they chose to refund the buyer, I would have no choice but to take the matter further against the buyer, as in my opinion committing fraud and I would also take action against paypal if they removed money from my account.

Within 1 hour I received a message from paypal saying that they had decided to refund the buyer.....but due to the unique circumstances of the claim, they would cover the refund themselves and not remove any money from my account.

Thought I would let you know the outcome in case it might be helpful to other sellers