If it's the Lima Warship class loco it was listed as "for parts or not working", which eBay defines as: An item that does not function as intended or is not fully operational. This includes items that are defective in ways that render them difficult to use, items that require service or repair, or items missing essential components. See the seller’s listing for full details.
Your choices are to refuse to accept the return, in which case the buyer can try opening a case under eBay's money back guarantee. However, given your clear description eBay should hopefully support you if you refuse to accept the return. If so, they will also block the buyer from leaving feedback.
If you choose to refund the item ask the buyer to open an ordinary return request through eBay, and to return the loco at their own expense. On return you will however have to refund the buyer's whole payment, including the original postage.
