I am surprised that the buyer has not opened an INR case through Paypal - if someone was holding that amount of money of mine and I hadn't received what I had paid for I would be doing just that.

If the buyer opens an INR dispute then Paypal will have no choice other than to refund the buyer by either releasing the funds they are holding from your or from their own pocket....which I am sure Paypal will be reluctant use their funds to reimburse the buyer.

I agree with Lyndal - the ombudsman may be the way to go.

As a last resort I would ring Paypal tomorrow and tell them they have 24 hours to release the money back to the buyer or you will be lodging a formal complaint with the ombudsman.