He's right, but, IMO, this is where things can get muddy.
There's, as I see it, a tendency to assume that Perception = Sight, so if you don't see your target, you can't affect it.
But what if you're hearing it, and thus knows it's there? What if you can't see him, but sees the footprints he leaves in the mud? What if he stinks an awful lot? What if you've got a spell that allows you to see odors or sounds? What about Eyes of the Bat? What if it's invisible but you're touching it?
One could make an argument that, whatever your means of perception, so long as they allow you to tell that there's someone here, you can target it. Otherwise, being Blind is one of the worst flaws any magus could have, clearly worse than Short-Ranged Magic (Major Hermetic).
So, here, how do you know you demon is still in the circle? How do you know he hasn't escaped? If you've got a way to tell, one could argue that you are perceiving it.
On Wizard's Sidestep, it gets discuted in the Ranulf thread, if you're interested, with arguments going both ways.
Now, in order to maybe spark some discussion, let's see...
You're using Creo Terram to create a Stone Wall at a given point. Your Target is the stone wall. But what's the target you're perceiving? The place where you are creating the wall? Could you create a boulder over someone’s head or not, and if so, why?
Going by analogy, you’re using Creo Ignem to create a Fire in a fireplace. Your Target is the fire. What about your target? And what if your point is the inside of a circle inside of the fireplace?
=> Can a magus create a stone wall at voice range inside a circle he’s seeing, but not a fire? In fact, Circle if Encompassing Flames works not unlike your stone wall, in this instance. Couldn’t he cast it inside the circle?
So, what would I do?
I’d disallow non-perceived spells where the Target and the target are the same, that is, Mentem spells, Vim spells and such. There’s nothing you can target here.
I would allow “conjuration” spells targeted at the circle’s ground, or at the space above it. That’s the target you’re seeing, just like if you where creating a boulder there. If something invisible happens to be there, too bad for them. BUT you may very well miss, especially with a Pilum of Fire, that may pass aside the invisible beastie, and you’ll have no way of knowing it.
Now, if you’ve got Circle if Encompassing Flames and cast enough of them to engulf the entire circle interior in flames, your demon will be charcoiled, even though he was never directly targeted by the spell.