I think neither side disputes that Israel oppresses Palestinians, so let me sum it up:
The Pakistanis are saying that any trade with Israel is indirectly subsidizing their oppression of Palestinians.
The Indians are saying it's all business and they don't really care where their money goes.
Bottom line, Indians will do business with the devil if it serves their interest, while Pakistanis claim the moral high ground.
Yes, Pakistan does business with countries (US, China, Muslim countries) which also have policies against Muslims, but they can't compare in scale and intent to the Israeli atrocities.
PS. Israeli Arabs are not "living peacefully" in Israel. They are second class citizens who face daily discrimination in employment, housing, education, ...