Yes, that is where the pan interferes with the frame. Although in my case I took a dremel to the frame instead of altering the pan more than what is already shown in that picture. I dont believe that part of the frame(it isnt really the frame, more like a gusset), isnt all that important to the structural integrity of that area. Again, this is just my opinion, I will keep a close eye on this area and strengthen if need be.
The actual frame rail will need a little bit of metal cut out of it regardless if you make the modification youve drawn above or not. Its just the nature of using the S14 pan. In the picture youve drawn on, the flange on the left will contact the drivers side rail but like I said nothing that cant be solved with a little metal removal.
I believe I took ~97mm out of both parts of the shift linkage. I have not put this in the car yet so Im not sure if it will fit. Nick Vyse told me he took out around 1", so that is quite a large difference.
I am using the complete M3 driveshaft, but again I have not put it in the car so I cannot tell you with certainty that it will work.
Sorry I cannot be of more help, this project is on hold for me right now while I get my other car back on the road.