> If the file is found then there is no undefined behaviour in the process of the file being included.

Correct; but processing doesn't stop there.

> There might be undefined behaviour in the overall translation unit

But what does that mean; how do you infer that there might be undefined behavior?

Does ISO C define the behavior, or does it not?

ISO C has nothing to say about what is in #include <winkle.h> if such a header is found and didn't come from the program.

Without having anything to say about what is in it, if it is found at all, ISO C cannot be giving a definition of behavior of the tokens that are substituted for that #include.