Hi Richard,
You can only fillet an internal corner if the two converging faces are on the same body. If the hinge is a seperate body than what it is attched to you'll only be able to fillet the edges of the hinge's body, this is why the arrow is pointing the wrong way.
To fillet an internal corner you need to join the hinge and the other part, you could use Modify/Combine. Or when you extrude the sketch of the hinge profile, make sure the Operation is set to "Join" in the extrude dialogue box instead of New Body.
Ed.