You go to live.com and search for something like a wii. One of the sponsored links is from eBay stating a cash back amount. Use the link to get to eBay. There should now be an icon at the top of the page that says Microsoft cashback.
Now, make you purchase via Buy It Now and pay with pay pal. At the end of the transaction, you will get a button that says "Get Cashback". There will also be a message in your eBay messages with the same link. Follow it and enter your live cashback id information. You should now have the cashback in your live account. In 60 days, it will be deposited to your paypal account.