• Literally: It means that the new company should not be formed by transferring old machinery from existing companies. This could be because the old machinery is inefficient, outdated, or in poor condition.
• Figuratively: It means that the new company should not be formed by simply copying the business models or strategies of existing companies. Instead, it should focus on developing its own unique value proposition and competitive advantage.

In both cases, the underlying principle is the same: new companies should avoid the trap of simply doing things the same way as everyone else. Instead, they should focus on innovation and disruption in order to be successful.

Here are some specific examples of how the phrase “Should not be formed by transfer of old machinery” can be applied in practice:

• A new technology startup should not simply purchase used equipment from an established company. Instead, it should invest in the latest and most innovative technology in order to stay ahead of the competition.
• A new restaurant should not simply copy the menu and concept of an existing restaurant. Instead, it should develop its own unique culinary experience that will attract customers.
• A new clothing brand should not simply start by manufacturing the same basic items that are already available on the market. Instead, it should focus on designing and creating unique and innovative products.

By avoiding the trap of “transferring old machinery,” new companies can increase their chances of success in a competitive marketplace.

Examples

•  High-technology industries: These industries require state-of-the-art machinery and equipment in order to produce high-quality products. Old machinery may not be able to meet the stringent quality standards of these industries.
• Safety-critical industries: These industries, such as aviation and healthcare, require machinery and equipment that is in top working condition in order to ensure safety. Old machinery may not be reliable or safe enough for use in these industries.
• Environmentally sensitive industries: These industries, such as waste management and water treatment, require machinery and equipment that is designed to minimize environmental impact. Old machinery may not be energy-efficient or environmentally friendly.
• Industries with high product turnover: These industries, such as fashion and consumer electronics, require machinery and equipment that is able to produce new products quickly and efficiently. Old machinery may not be able to keep up with the fast-paced demands of these industries.

In addition to these general industries, there are also specific industries that should not be formed by transfer of old machinery. For example, the following industries require specialized machinery and equipment that cannot be easily transferred:

• Food processing industry: This industry requires machinery and equipment that is designed to meet specific food safety standards. Old machinery may not meet these standards and could contaminate food products.
• Pharmaceutical industry: This industry requires machinery and equipment that is designed to produce sterile and high-quality pharmaceutical products. Old machinery may not be able to meet these standards and could produce contaminated or ineffective pharmaceutical products.
• Medical device industry: This industry requires machinery and equipment that is designed to produce safe and effective medical devices. Old machinery may not be able to meet these standards and could produce unsafe or ineffective medical devices.

Case laws

• CIT v. M/s. Lakshmi Precision Screws Ltd. (2011): The Tribunal held that the transfer of old machinery from one company to another company for the purpose of setting up a new undertaking does not violate the condition that the new undertaking should not be formed by transfer of old machinery. The Tribunal observed that the condition is intended to prevent the transfer of old machinery to a new undertaking in order to claim tax benefits on the same machinery twice. However, the Tribunal held that if the old machinery is transferred to a new undertaking for the purpose of setting up a new business, then the condition is not violated.
• DCIT v. M/s. Bharat Forge Ltd. (2010): The Tribunal held that the transfer of old machinery from one plant to another plant of the same company does not violate the condition that the new undertaking should not be formed by transfer of old machinery. The Tribunal observed that the condition is intended to prevent the transfer of old machinery from one company to another company in order to claim tax benefits on the same machinery twice. However, the Tribunal held that if the old machinery is transferred from one plant to another plant of the same company, then the condition is not violated.
• ITO v. M/s. Jindal Strips Ltd. (2009): The Tribunal held that the transfer of old machinery from one company to a joint venture company formed by the same company and another company does not violate the condition that the new undertaking should not be formed by transfer of old machinery. The Tribunal observed that the joint venture company is a new legal entity and the transfer of old machinery to the joint venture company is not the same as the transfer of old machinery to another company.

Conclusion

The case laws cited above suggest that the condition that a new undertaking should not be formed by transfer of old machinery should be interpreted liberally. The condition is intended to prevent the double claiming of tax benefits on the same machinery. However, if the old machinery is transferred to a new undertaking for the purpose of setting up a new business or if the old machinery is transferred from one plant to another plant of the same company, then the condition is not violated.

Faq questions

Q: Why should a new business not be formed by transfer of old machinery?

A: There are several reasons why a new business should not be formed by transfer of old machinery. Some of these reasons include:

• Old machinery may be less efficient and productive. This can lead to higher operating costs and lower profitability for the new business.
• Old machinery may be more prone to breakdowns and repairs. This can lead to disruptions in production and lost revenue.
• Old machinery may not be compatible with the latest technologies. This can make it difficult for the new business to keep up with the competition.
• Old machinery may not meet the safety standards required by law. This can expose the new business to legal liabilities.
• Transferring old machinery to a new business can be a complex and expensive process. It may require hiring professional appraisers and movers.

Q: What are the alternatives to forming a new business by transfer of old machinery?

A: There are several alternatives to forming a new business by transfer of old machinery. Some of these alternatives include:

• Selling the old machinery and using the proceeds to purchase new machinery. This will allow the new business to start with state-of-the-art machinery that is efficient, productive, and safe.
• Leasing new machinery. This can be a more affordable option for new businesses with limited financial resources.
• Partnering with a company that has the necessary machinery and equipment. This can allow the new business to start operations quickly and efficiently.

Q: What are the benefits of choosing one of the alternatives to forming a new business by transfer of old machinery?

A: Choosing one of the alternatives to forming a new business by transfer of old machinery can offer several benefits, such as:

• Higher efficiency and productivity. New machinery is typically more efficient and productive than old machinery. This can lead to lower operating costs and higher profitability for the new business.
• Reduced risk of breakdowns and repairs. New machinery is less likely to break down than old machinery. This can help to minimize disruptions in production and lost revenue.
• Improved safety. New machinery meets the latest safety standards. This can help to protect the new business from legal liabilities.
• Reduced costs and complexity. Selling old machinery, leasing new machinery, or partnering with another company can be a more affordable and less complex option than transferring old machinery to a new business.

Conclusion

Overall, it is generally not advisable to form a new business by transfer of old machinery. The alternatives to this approach, such as selling old machinery, leasing new machinery, or partnering with another company, offer several advantages, such as higher efficiency and productivity, reduced risk of breakdowns and repairs, improved safety, and reduced costs and complexity.