@samasell Reply to the buyer on ebay that you can't refund until you get the item returned to you. Let them know that this is an ebay policy. Explain that they will need to open a return. They will get a return label and can then ship the item back to you. Once you receive the item, you can issue the refund. Make sure you are responding to every step of the return in the time ebay gives you, or they will automatically refund the buyer and let them keep the item.
Depending on how your listings are worded, you may be able to deduct the amount of the shipping from the refund. Don't argue with the buyer as they may intentionally damage the item before sending it back to you. You should not receive a defect as the buyer has already shown that they are returning because they don't want it. You can also add buyers to you Blocked Buyer List that you don't wish to do business with in the future.
I see that you're in Sri Lanka. You might want to check if the rules are different there than they are here (in the US). Good Luck!
