Doesn't matter where Silva's arm is. If it hits his hand, it's a handball, as he's an attacking player. Liverpool have gained advantage from a City handball not being given, I don't see the problem. You can't reasonably expect them to review the incident, decide that it's not a penalty because there's a city handball, and then pull play back to award a Liverpool free kick?
Had it not started with the Silva handball, it's a clear penalty.