GMAT Sentence Correction (SC) | Re: The use of lie detectors is based on the assumption that

Responding to a PM:
The concept that "that" / "which" cannot refer to a noun within a prepositional phrase is wrong.

I am sitting on a chair, which is broken.
I have searched inside the bookshelf that I bought last week.

In both sentences "which" / "that" refers to a noun within prepositional phrase.

Option A above is an example of an exception to modifier touch rule. A list of such exceptions are listed in the Manhattan SC guide.

Your second query:
"Which"