That is correct: students who are young for grade will have higher age percentiles than grade percentiles, and students who are old for grade will have higher grade percentiles than age percentiles.
Fairness is another issue. On the one hand, it may be more equitable to make the adjustment for age, if the program is selecting based on native ability/presumed rate of learning. On the other hand, using grade percentiles levels the playing field based on instructional exposure, which might make sense if the program is more focused on pure achievement. Or one could use either or both as a selection tool, which would cast the broadest net. So it depends on the objectives of the program and resulting selection process.
