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If he starts a dispute, Payal will not even investigate it. They are only interested if it doesn't turn up as its impossible for Paypal to judge the condition of an item.

It happened to me with a rallycross RC car. We discussed the condition of the car over the phone. The guy wasn't happy with the condition of the car and I refused to accept the car back. He opened a paypal dispute and I continued to refuse. He raised the case to paypal judgement (or however it is termed) and they closed the case immediately.

If you want to keep things friendly then take it back and refund him for all fees execpt returning postage. If you want to stick to your guns let him raise a dispute. I'd be amazed if they did anything.

Just to note have you checked ebay new fee structure? Its already too high and its getting worse. Time for a new auction site IMO.
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