> Note the existing test doesn't actually perform a build so the new
> test also doesn't, but it does check the core logic
Sounds good to me.

+    def manifest_setup_ldargs
I’d make all new methods private ones (i.e. leading underscore).

> an embedded manifests
Typo: extra s

> return None if not temp_manifest else (temp_manifest, mfid)
Using a ternary expression runs afoul of PEP 291: distutils should remain compatible with 2.3.  (I’m not sure it is right now, we use modern unittest methods in tests and all, but it is no reason for making it worse in new code :)

Your patch will also need an entry in Misc/NEWS; at first glance, there is no documentation file to edit.

Will you port the patch to packaging in 3.3?  I can do it if you don’t have the time, but I’m not set up yet to test on Windows, so I can ask you to test a patch.  Also, for the distutils2 backport (which I can do too), we would need to run tests with all versions from 2.4 to 3.3.