Got it.
Yes, the MIC directly referencing the Material Function in your screenshot is indeed weird. I’m not able to get my MIC to show a direct reference like what is happening to you. Are you testing it with a mostly empty Material Function in the stock editor for the repro steps, like I’m doing? If we can get simple repro steps on the stock editor, then I’ll be able to see why it’s happening; otherwise, it’s something specific to your project, its assets, or potential engine modifications.
If we can’t get repro steps on an empty project in the stock editor, what you can do is to look into why the Material Function is being added as a dependency to the MIC in your project: add a breakpoint into `FPackageHarvester::TryHarvestImport`, save the MIC, and check the stack once it hits the breakpoint while trying to harvest the Material Function as an import.