Normal epithelial cells often exert anti-tumor effects against neighboring oncogenic cells. In Drosophila imaginal epithelium, clones of oncogenic cells mutant for apico-basal polarity genes such as scrib or dlg are actively eliminated from the tissue by cell competition when surrounded by wild-type cells. We and other groups have previously shown that JNK signaling is required for this cell elimination. However, the initial event occurring at the interface between normal cells and polarity-deficient cells remained unknown. To address this, we performed an EMS-based genetic screen in Drosophila eye imaginal disc and identified the ligand Sas and the receptor-type tyrosine phosphatase PTP10D as the cell-surface ligand-receptor system that drives tumor-suppressive cell competition. At the interface between wild-type “winner” and polarity-deficient “loser” cell clones, winner cells relocalize Sas to the lateral cell surface while loser cells relocalize PTP10D to the lateral cell surface. This leads to trans-activation of Sas-PTP10D signaling in loser cells that restrains EGFR signaling, thereby enabling elevated JNK signaling in loser cells to cause cell elimination. In the absence of Sas-PTP10D, elevated EGFR signaling in loser cells switches JNK’s role from pro-apoptotic to pro-growth by impairing Hippo signaling, thereby causing overproliferation of polarity-deficient cells. These findings uncover the mechanism by which normal epithelial cells recognize oncogenic neighbors to trigger cell competition.