Well, without knowing anything else about the pistol, I think there is one possibility worth considering. I don't think it would enhance the value of the pistol, as it would be completely unprovable, and either way the engraving is nothing more than vandalism regardless.
However it is a possibility that the engraving may not be quite "sheer fantasy", at least in one regard.
While it is very clear that there was never any "production" or "unit" engravings like this, could it be possible that a zealous member of the SS might have had this engraved on his own pistol? Correct me if I'm wrong, but weren't officers required to provide their own Lugers? I seem to remember that this was the case, resulting in a number of WW1 or commercial, between the wars pistols having seen duty accordingly. Is this inaccurate?
Would a privatly procured arm be subject to military regulations regarding personalization?
The only reason I even propose this possibility is that the engraving does appear to be a very accurate SS style deathshead.
It is equally possible...indeed most likely much highly probable that it was done in some hack shop post-war, especially in light of the apparent discoloration around the skull.
However, I thought I might play the devil's advocate and propose a scenario that might have established some period provenance.
You guys are the experts. Could that scenario have happened?
You've all seen the fantastic "Shell Casing" artwork bored soldiers produced during the 1st and 2nd World Wars...I'm sure there were periods of boredom for some members of the German military machine as well. In particular in a rear echelon unit where you might find some staff bozo with a Luger he'd never really need.
Completely unprovable, highly unlikely, ultimatly moot, but still...
...a possibility!