It is not up to the seller to dictate which means of postage is used to return the item to him given that he has screwed up. It is his responsibility to issue you with an eBay Returns label so that you can return the item in line with eBay's policies relating to returned items. If the seller had done this then the eBay Returns label would provide tracking, and provide eBay with proof of successful or attempted delivery, which would result in your refund being accepted. It may well be that the seller is trying to mislead you into using a different means of postage so that he gets the item back but there is no proof that you sent it back, in which case eBay would not refund your money.
To begin with, contact the seller and ask for an eBay Returns label and see what kind of response you get. If the seller abides by your request and issues you with an eBay Returns label then use it to return the item to the seller. If, on the other hand, the seller fails to reply or tries to fob you off with some silly reason as to why it would be better not to use an eBay Returns label then once you have the opportunity to do so escalate the case to eBay in order to get them to step in and help to resolve the matter.
In the event that eBay do have to step in and resolve this matter for you due to the seller's refusal to issue you with an eBay Returns label they would more than likely force a total refund, regardless of whether or not the seller was in agreement with their decision. If eBay were to do that then you wouldn't need to return the item to the seller; however, if he really wanted it back badly enough then it would be up to him to make alternative arrangements to get the item back again. However, my own guess is that he wouldn't bother chasing you to send it back and would decide that it would just be better to cut his losses.
