As a businessman, whatever he wants to do inside his hut is his own business. Of course he must have known that the watch was replica. He has trained himself in that niche, hasn't he? lol. He, may be, wanted to know how much it was worth actually, and may be, he found it the hard way when he opened it up.
He then may have realized that he wouldn't be making as much money on it later when the watch was minutely re-inspected. Of course he would not give much to your own feelings and he thought he could get back his money by uttering the T word. I don't say that he was wrong, and any business person would do the same.
Another incident comes to my mind... it shows how a really shrewd business person judges his clients/partners secretly and much in advance before committing to a partnership deal, and then only thinks about the long- and short-term business activities with the other person:
It was around 1989, and I had just began my career in programming. While working at a client's place, a friend of that client walked in casually and chatted with me. Later he called me to his office for further discussions about his project - a full accounting package that he wanted, and especially wanted a tracking module for his 'inventory' that was a lot more important.
I went to his office the following day. He got me seated across his long table. There were small mountains of diamonds lying in front of him. There were low level lights highlighting the shine and glare. I had never ever seen so many 'stones' in my life. I kept my sight away from them though.
He chatted casually for another 2-3 minutes and asked me to be comfortable while he left the room saying that he would come in minutes. I was alone there. There were atleast 100 or 200 (may be, a lot more) diamonds in front of me across that table. The person came after almost 40 minutes. I felt that he was watching my moves secretly, or was there hidden camera? Possible. I never even lifted my hands.. I sat there like another stone. lol
Later he took me to another room, where a small crowd of diamond cutters and other merchants were gathering. He introduced me to some of he most famous diamond merchants in Mumbai. I saw how they did their business... small paper packets filled with diamonds were passed along freely, and not a word of account was written down. Everything went by the word. Absolutely!
So this is how they build the trust. Word of mouth are more precious to them and they respect each other. Millions of rupees worth of diamonds changed hands that evening, but I didn't see any one writing down any thing. There were figures thrown around and everyone knew what they were doing.
The point is: cheating one another in business can mean the end of business life. Reputation and trust is what counts even while trading millions and billions. Of course, the reputation and trust is never built in haste or in blind faith.
You are of course capable of judging what's right or wrong, and you must also be well trained to make those judgements fast and based on the situation. So I wouldn't blame you or any one if you do not wish to see that face again.
Deep inside, you must have known that he didn't do what was needed, and then he used a huge word like T in duping you further. There are many facets to any situation and you may be absolutely right in taking the decision that you'll eventually take.
I'm not sure any more if there is trust. I am stumped. It's like taking a vintage Chanel purse and altering it. Why would anyone want to do that? The value of the purse would go to zero. Is he stupid or was he trying to put one over on me? Even if I do pay him back, I don't know what to do about keeping him as a client.