The Upgrade action is the correct method for this scenario. When a solution is imported as an upgrade, it replaces the existing version with the new one. A critical part of this process is that it performs a deletion step, removing any components (such as columns, tables, or flows) that were present in the previously installed version but are not included in the new, upgraded solution. This directly addresses the requirement to merge hotfixes into a new version and delete obsolete components from the target environment.

A. Update: The update action overwrites existing components and adds new ones, but it does not remove components that are no longer part of the solution.

B. Create: This action is for generating a new solution from scratch, not for managing the versioning and deployment of an existing solution.

D. Patch: A patch is a small, incremental update to a parent solution. While used for hotfixes, the patch itself doesn't merge all changes and remove old components; that is accomplished by cloning the solution and then performing an upgrade.

1. Microsoft Learn | Power Platform ALM Guide: "Update or upgrade a solution". This document explicitly contrasts the two actions. It states, "The upgrade option deletes any components that existed in the previous version but are no longer present in the upgraded version." This directly supports the choice of 'Upgrade' for removing obsolete components.

Section: "Import the solution" > "Upgrade" option details.

2. Microsoft Learn | Power Platform ALM Guide: "Solution concepts". This guide details the behavior of different solution operations.

Section: "Solution layers" and "Importing solutions". It explains that an upgrade consolidates all patches and the base solution into a new version, replacing the old one and its related patches.

3. Microsoft Learn | Power Platform ALM Guide: "Create and use patches". This document describes the patching process and its lifecycle.

Section: "Clone a solution". It clarifies that after creating patches, you use "Clone Solution" to merge the changes into a new version of the parent solution, which is then typically deployed using the Upgrade option. This shows that patching is a preceding step, but the upgrade is the action that fulfills the question's requirements.