The teenager and Gail Dickinson, a friend of the boy’s family who had gone on holiday with them, were allegedly seen by his grandmother.
She told Dunfermline Sheriff Court she was too shocked to intervene and ‘didn’t want a rumpus to start’.
The family contacted police when they returned home following the incident on June 13.
Dickinson, of Glenrothes in Scotland, denies sexual activity with the boy, the Daily Record reported.
Speaking in court, the alleged victim claimed Dickinson told him: ‘Your mum thinks you’re a boy but I know you’re a man.’
He described how he had been out for drinks with his mum and Dickinson that evening.
His mum bought him two bottles of beer but did not realise Dickinson was giving him more alcohol when she got up.
He said: ‘Gail was coming on to me. She was touching my shoulders and legs.’
The teenager admitted he ‘regretted’ the alleged encounter the following morning and claimed it only happened because he was ‘pretty drunk’.
Giving evidence, his grandmother said she split the pair up after hearing Dickinson tell the boy ‘you’ve got a lovely package there’.
But she later heard whispering from the balcony, and saw Dickinson performing oral sex on her grandson.
She said: ‘It was a horrible situation. I couldn’t believe it.’
Dickinson was told to leave the flat the next day after being confronted by the grandmother and telling her: ‘I’m terrible, you must hate me.’
The trial continues.