Demai, Chapter 5, Mishnah 9. Before we turn to the words of the Mishnah, an introduction is in order: there is a dispute among the Tanna'im as to whether produce grown in Eretz Yisrael by a non-Jew is obligated in tithes or exempt from them. Our Mishnah takes the position that produce grown in Eretz Yisrael by a non-Jew is obligated in tithes, based on the principle: "ein kinyan l'goy b'Eretz Yisrael l'hafkia midei ma'aser" - the non-Jew's power of acquisition in the soil of Eretz Yisrael is not strong enough to remove its obligation in tithes. Even though the non-Jew himself is not bound by the laws of Terumah and tithes, his acquisition of the land does not change its status, and therefore his produce is obligated.
"me'asrin mishel Yisrael al shel nochri":
Since our Mishnah holds that produce grown by a non-Jew in Eretz Yisrael is obligated in Terumah and tithes, it follows that when we have before us produce of a Jew and produce of a non-Jew, one may separate from the one on behalf of the other.
It is worth emphasizing: when we speak of separating from the produce of a Jew, the reference is not to demai - produce bought from an am ha'aretz, from which the Jew may in fact have separated Terumah and tithes - but rather to certain tevel, produce from which Terumah and tithes were certainly not separated.
And the separation is effective in both directions:
"me'asrin mishel Yisrael al shel nochri" - from the Jew's produce on behalf of the non-Jew's produce.
"umishel nochri al shel Yisrael" - from the non-Jew's produce on behalf of produce grown in the Jew's possession.
Both are obligated in tithes to an equal degree, and therefore there is no difference between the two directions.
The produce of the Kutim:
Not only that, but it is even permitted to separate "mishel Yisrael al shel Kutim" - from produce grown by a Jew, which is certain tevel, on behalf of produce grown by the Kutim. The Kutim were a group of converts in Eretz Yisrael, and our Mishnah assumes that even if their conversion was valid, they were careful to fulfill the mitzvos only for themselves and gave no thought to the fulfillment of mitzvos with regard to others - that is, they were not concerned about the prohibition of "do not place a stumbling block before the blind." They would therefore sell others, without any hesitation, produce from which no tithes had been separated, and one may assume that produce bought from them is certain tevel.
From here follow the two rulings in the Mishnah:
"mishel Yisrael al shel Kutim" - from the certain tevel of a Jew on behalf of the produce of a Kuti, which is likewise considered certain tevel.
"umishel Kutim al shel Kutim" - from the produce of one Kuti on behalf of the produce of another Kuti, since we assume that both are certain tevel.
The view of Rabbi Eliezer:
Rabbi Eliezer forbids separating from the produce of Kutim on behalf of the produce of Kutim - from the produce of one Kuti on behalf of the produce of another Kuti. The Rav explains his reasoning: it is possible that one of the two Kutim originally intended to eat his produce rather than sell it, and since his intention was to eat it, he did in fact separate tithes from it. For this reason there is no certainty that both Kutim are in the same category, and one must be concerned that tithes have already been separated from the produce of one of them. Therefore one may not separate from the produce of one Kuti on behalf of the produce of another Kuti.
In summary: our Mishnah holds that "a non-Jew's acquisition in Eretz Yisrael does not remove the obligation of tithes," and therefore a non-Jew's produce is obligated in tithes, and one may separate from the certain tevel of a Jew on behalf of that of a non-Jew and likewise the reverse. So too one may separate from the produce of a Jew on behalf of that of Kutim, and from the produce of Kutim on behalf of that of Kutim, because the produce of the Kutim is presumed to be certain tevel. Rabbi Eliezer forbids separating from the produce of Kutim on behalf of that of Kutim, out of concern that one of them intended to eat his produce and had already separated tithes from it.