Sx-mhp water inlet nipple o-ring

[jharvey1984]

2003 volvo sx-mhp transom assembly: when I took the pivot housing off I didn't notice where the o-ring "rides" on the water inlet hose nipple. There appears to be a groove for it but it also contains the drain hole which doesn't make sense to me. Does it ride against the square flange portion. Sorry wish I would've taken some pics so hope this makes sense. I attached a google image of it. Basically does the oring go where the red or blue arrow is pointing?
Thanks in advance for any help/input.

 

[jharvey1984]

Just in case anyone else is looking for this later on it is the red arrow. Pullled the hose off the other drive to confirm.