FYI, you can't simply refit a ship in a one-off basis as you can with some other games. You need to create a new design, or modify an exisitng one. You can then upgrade a ship into any other existing design that is the same hull size, for a fee based on the components being changed, etc.

"Remove components on upgrade" is simply a convenience option, since you'll normally be replacing most of a ships components at the same time when updating older ships (as only changing it a bit is not cost-effective, most people will avoid doing it that way).