After threatening to cut supplies, Reliance Industries today withdrew the notice for suspension of natural gas supplies to four fertiliser plants in Uttar Pradesh saying it will work with urea manufacturers to resolve outstanding issues.

RIL had on October 1 served a notice for suspension of supplies to plants of Indo Gulf Fertiliser, IFFCO, KRIBHCO Shyam Fertilisers and Tata Chemical from 0600 hours today if they failed to enhance the financial guarantees to cover for state sales tax.

"In view of the assurances given by Director General, Fertiliser Association of India that immediate steps would be taken to address the concerns raised by RIL, we are, without prejudice to our rights and contentions, not immediately implementing the suspension of supplies but retain the right to suspend the supplies without any further notice," RIL wrote to the fertiliser firms today.

The fertiliser firms, which produce about 2 million tons of urea from gas sourced from RIL, had previously opposed providing financial guarantees in form of letter of credits to cover for liability arising from levy of local sales tax on gas sales, as it would increase cost of production and subsidy payout.

RIL supplies some 4 million standard cubic meters per day of natural gas from its eastern offshore KG-D6 fields to these plants. Like elsewhere in the country, it has been charging central sales tax of 2 per cent from users in Uttar Pradesh.

However, the state government has refused to accept it as interstate sale and has demanded local sales tax of 21 per cent.

Tax is a liability of consumers which had been clearly enshrined in the Gas Sales and Purchase Agreement (GSPAs) RIL had signed with fertiliser and other users.

Naturally, users should have contested the demand for higher sales tax but strangely, RIL went to the Allahabad High Court challenging the demand.

The High Court on July 26, 2010 stayed the Uttar Pradesh government demand.

The state government has appealed against the stay in Supreme Court.

Sources said RIL is demanding that users in Uttar Pradesh enhance value of Letter of Credits, that had been previously submitted as guarantee against default, to cover for payments in case the state sales tax liability was to materialise.

So far, only state power utility NTPC is the only firm that has enhanced LCs while fertiliser firms have not done so, leading to the notice for suspension of supplies.