Fit them flush as your first pic, as you have already established your shocks are too long so it will sit better when you get the correct ones
Ive been meaning to paint the inside of my rear tub where you see through the arch black but after 1200miles its not orange in there anymore!
Looks good with the black arches but im biased as i have the same!
I liked the contrast between the orange and black so much i went for a black scuttle too
