It means: You interview at Level X, but they give you later on offer for Level X-1. As a reason, they will claim you haven't scored good enough in the interview loop - which might be true, but also might have been the result of bad questions or an incompetent interviewer.

Sources: I know people in person who got these kinds of offers.

Your a sr (eng III) and they give you a eng II offer. Internal promotions at google are way too much work relative to the rest of the market.