Don't worry about the threat of libel, this is highly unlikely to materialise.
As regards the small claims court, your seller will lose if they pursue this silly claim. All transactions on eBay are governed by eBay's user agreement, which the seller has clearly not read.
In it, both you and the seller accepted that eBay, not you or the seller, would determine whether the seller had to refund you and whether the item had to be returned. When eBay supports a money back guarantee claim, the seller is required to send a prepaid return label if they want the item back. If they don't, the buyer is not required to return it.
This dispute has been determined in accordance with the user agreement, in which you also both agreed to accept eBay's decisions. If your seller wishes to dispute it, their dispute is with eBay.
You can read the full terms and conditions of eBay's money back guarantee, see: http://pages.ebay.co.uk/help/policies/money-back-guarantee.html
In your position, to try to save both of you the time and hassle of a court case, I would point this out to the seller, and also offer to return the item if they first send you to cost of postage. If you don't feel comfortable about this, don't do it. If in doubt, consult a solicitor and show them eBay's user agreement and money back guarantee.
