> Next thing i did was i compiled my model using Source SDK item test thingy.

Why are you compiling it using that? Use the beta compiler in TF2 please. http://steamcommunity.com/sharedfiles/filedetails/?id=155101824

I've never run into this situation before, so that's how I would have approached it. Can you try contacting someone who has done something like this before? See if you can figure out how they did it.

As far as I know you're going to have to match the skin texture and shading exactly. Extract the scout head texture from the .vpk and see how the vmt was set up. Then mimic any shading masks, phong exponents, and rim lighting.

Check out this video:
http://www.youtube.com/watch?v=JP9ce_ygeSA

The half-life model viewer and source filmmaker are the best ways of doing that.

Yeah. The same goes for effects. For the time being, you're gonna have to ask Valve to do custom particle effects until they add support for it.

You can't. It will have to be animated which Valve will do if it's accepted.

I wish I knew what was going on... It might be a problem with TF2's vpk. Try verifying the game cache files.

From the Library section, right-click on TF2 and select Properties from the menu.
Select the Local files tab and click the Verify integrity of game cache... button.
Steam will verify the game's files - this process may take several minutes.
Once the process is completed, the Check Window will automatically exit.

I've never encountered that error before. Make sure you are uploading .smd files for the model and .tga files for the textures (and backpack icon). Try switching your item from being a hat to a misc item (or vice versa). Also, just to be sure, make sure your compile name has no spaces (i.e. "exampleHat" instead of "example Hat").

Try decompiling the sven model from the vpk as I described in the video. Use the decompiled version since it will be correct.

This is really weird... You are using the Sven model Valve supplied in the workshop, right? I would try starting a fresh scene in Blender, importing a fresh sven model, and then import your guanlet. Re-rig the model and export the .smd file (no animations are required).