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Firstly, there's no perfect way to go about it — the HR will hold some degree of grudge against you & your college's RCC/PCC/ICC — you've got to accept that reality and move on. This is a simple business decision, and HRs and your RCC/PCC/ICC are well aware that every rational person would leave a T2 firm if they get a nice enough team of choice in a higher paying T1 firm.
Secondly, once you've decided that you'll be saying no, try to do it as early as possible — the best case scenario is to back out when you have only an oral confirmation rather than after the receipt of the formal mail. The more you delay, the worse the dynamic will get b/w you, the HRs, and potentially the RCC/PCC/ICC as well as any partners who recommended you.
Thirdly, on the actual content of the conversation/mail, in addition to the basic essentials, try to make it look like it's based on as many external factors as you can think of. Here's an example:
- this is your first physical internship in this city, and after a lot of illness and troubles, you have received medical advice that because of your seasonal asthama etc, the city of Delhi is simply not sustainable for you. Thus, you can't accept a full time position with that team/firm.
Lastly, be as polite as possible — appreciate their internship programme and organisation as much as you did in the PPO interview etc. Apologise to the HR for causing them inconvenience, and draft a formal message on similar lines to the partner/seniors who recommended you. The last part can be supremely helpful, because one of the partners ended up being considerate about it and expressed interest in recommending me whenever need be.
Saying no is never an easy thing within any form of corporate communication, but sometimes needs to be done regardless. All the best!