If you send a customer the wrong item or a defective or counterfeit item, you are obliged to provide an exchange or refund. If you are not able to ship the item or it gets lost on the way to your customer then you need to refund it. As a general rule, if you made a mistake and did not deliver to the customer what they ordered then you need to either refund or allow an exchange or return.
Other than that, it's your store, you can set the policies to be whatever you like. Bear in mind you are selling online where customers can't see or touch the items before they order them, so you are more likely to get sales if customers know they can return the items if they don't like them.
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