According to the factory, either side can be up. There was an early production modification to allow that (note the redundant hole for the oil passage to the head).
My preference is to install the flat side down, but I don't know that it makes any difference.
The book says to use "jointing compound" (the TR3 manual specifies Wellseal or equivalent). But my experience has been that, if everything is right, it will seal fine with no coating, and if something is wrong, coating won't help. So I make sure the liner protrusion is between .004" and .0055" on both sides, then install it dry. I learned the hard way to check both sides; spent a long time fighting blown head gaskets before I discovered I had a block that wasn't machined quite right. Oddly enough, I discovered the same thing with my current TR3, so I suspect it was common at least in the early days.