Question

We say that we don't change third person singular in narration.
Then why in the following sentence
"It" has been changed to "that".
Q:. Rohan:Are you taking part in it?
Ans:Rohan inquired whether she was
taking part in that.

Answer 1

We don't change third person singular, but we do change the words to describe what is being talked about. 

Let's imagine it in this way
You are the third person. You are telling someone else, who is in no way related to the topic you are talking about. 

The "it" in the sentence is something you know about, but the person you are telling it to knows nothing about it. So, to explain to them, you will say "that day" or "that"

You: She said she was taking part in it.
Someone else: In what?
You: You remember that thing I told you about that day??