you can agree to full refund and the tracking needs filling by buyer, you refund once it is received.
or there is option for partial refund, (and they can keep item) either one you can offer and they can accept and it moves forward without being escalated..
.it is complicated though, you cannot just refund them immediately which is silly. Sometimes something is defective and you do not want item back or they do not want to return it at their expense....
The option should be in ebay your resolution center and then click view/open/display dispute and then it gives you various options to deal with the dispute. If its not there then thats weird!