Just be honest with PayPal and tell them all the information you just wrote, might help to call Xbox live help and see if they can give u a date and time it was redeemed or even a geo area to back yourself up, sounds like an open and shut case for you as long as you can get something out of Xbox live - good luck mate
- Wrote an e-mail to the buyer to ask what happened and why he have opened a case?;
- Say to him that you have the code in your hands a tangible item and can write to Xbox's Support to be disabled at any time, for example "stolen from the store" and you're some store rep. So therefore any purchases or whatsoever he have done with the code, will be reserved + his account might be banned/suspended for using a fraudulently added code.
Make some story, be creative.
Sorry to tell you bro but you got scammed, i have seen them alot, the dispute is not because the code didn't work or any other reason, the thing is they know u dont have a prove of delivery so paypal wont protect you and they have redeemed the code.
Check his feedbacksl from the sellers you will see if he has bought xbox codes or gift cards recently (all of them delivered by email) they are always scamming alot of people and ebay cant do anything that is way they recommend you to dont deliver like that.
The only solution i can see now is try to contact xbox to disable the code but i really dont know if it will work.
Best of luck man