Understanding the variation of lags with respect to the X-ray flux is important to explore the geometry of the inner region of the accretion disk in AGNs. We performed frequency-lag, energy–lag and spectral studies for two sets of observations, in order to investigate the variations in lags with respect to X-ray flux in the AGN source Mrk 704 using the XMM-Newton observatory. We divided one of the light curves into two sections which were noticed to exhibit a flux variation. The frequency-lag spectra in different energy domains revealed that reverberation (soft) lags varied along with the flux. For the first time, we show that the blurred reflection model can consistently explain the soft excess observed in the X-ray spectra for this source. The fluxes of soft (i.e., reflection) and hard components were noted to vary by ∼18% and ∼9% respectively, across the sections. The soft lag amplitude was found to be larger at the high flux state than the amplitude at the low flux state. Most importantly, we found that both frequency-lag and energy–lag spectra do not display significant variation between two observational data sets despite a flux variation of 43%. This phenomenon cannot be explained by the reflection model because the soft lag amplitudes must be larger in the high flux state. The probable scenario is that, in the low flux state, the obscuring cloud delays the reflected soft photons which increases the soft lag amplitude.