You may be willing to accept the item, however the seller is not willing to send a defective product.
If he has refunded the money to your PayPal account, then you will probably receive notification that the Seller is attempting to Cancel the transaction.
When the seller is cancelling the transaction you have three options:
1) Do not accept the cancelation (Buyer will not be refunded fees and you will not receive the item)
2) Agree to Cancel (Buyer will be refunded fees)
3) Do no respond. (After 7 days of no response he will automatically be able to close the case and receive his final value fee credit.)
As a seller sending "imperfect" items to customers is sometimes risky as if the customer decides that they don't like the crack they can then return the item which would then cost the seller the shipping costs plus the time lost. (Obviously this is not all buyers, however there is sometimes people who agree to the item with a scratch for example but then don't realize how much they dislike that scratch)