The structure indicated is the tunica vaginalis.

The tunica vaginalis forms the serous covering of the testis, originating in embryological life from the processus vaginalis of the peritoneum (an embryonic outpouching of the peritoneum). In fetal life, the processus vaginalis precedes the descent of the testis into the scrotum from the abdomen and then closes off. The remaining part then becomes known as the tunica vaginalis which adheres to the surface of the testis and reflects back onto the internal aspect of the scrotum. It therefore consists of a visceral portion and a parietal portion. The visceral portion adhering to the testis and the parietal potion adhering to the internal scrotal wall.

If the processus vaginalis fails to close off, peritoneal fluid can therefore travel into the scrotum leading to the formation of a hydrocele.

Learn more about the anatomy of the testis and male reproductive system in this tutorial.