I appealed to eBay via telephone, they stated that, because the buyer mentioned the damage in their opening e-mail, I had to refund.
I pointed out that:
The buyer had it for three weeks. If the buyer sent it on to someone in the forces and it was damaged then, that's their fault not mine.
It couldn't have been damaged in transit, as the outer plastic case is still in perfect condition, so how did the iPod get a dent and a broken screen?
The buyer has damaged it themselves, and it now fraudulently claiming "not as described".
The buyer said in a later message, after I asked them to clarify, that the iPod worked fine on the first day they had it.
eBay bloke took a couple of minutes to go away and read, and came back with "because the buyer pointed out the damage in their opening complaint, you have to refund the buyer. Your appeal has been unsuccessful".
This despite the "opening complaint" being 3 weeks after it was delivered(!). eBay are blaming transit damage, even though said damage could have occurred when they forwarded it on, not when I sent it. Of course, that didn't happen anyway because the plastic case is fine.
So it's on to the county court. In my county court claim I am claiming the full amount I have lost, i.e. the £172 they paid, plus my original postage, plus court costs, giving a total of £203.
I intend to write them a "without prejudice" letter, offering to settle for the cost of repair, which is around £110. Otherwise I shall proceed to court seeking the full amount.
EDIT: @Oli, no, they still haven't left any feedback to this day.