Vodafone's operations in India have hit a major obstacle after the government refused to extend the company's licence to operate in three major Indian cities. The current 20-year deal expires in late 2014.

India's telecom department has ordered Vodafone India to bid for the licences at auction in order to continue its operations in Delhi, Mumbai and Kolkota.

"Unless you participate in auctions and get your bid confirmed, you would not be entitled to wireless licence, which is a requisite," the ministry said.

Vodafone chose not to take part in the auction process, which began in February. It has appealed against it in court, claiming its current licence allows a ten-year extension on expiry. According to data from the Telecom Regulatory Authority of India (Trai), Vodafone had 150 million users in India at the end of 2012; the three cities in question account for about 13 percent of its total customer base.

In a statement, the company said that it was extremely disappointed with the government's move.

"This decision is against the interests of our several million customers in these cities/circles," Vodafone said in a statement.

"In addition, there appears to be no acknowledgment by DoT of the full and faithful operation of the licence for 18 years - for being a pioneer and entering the market when there was no concept of mobile telephony in India, for investing tens of thousands of crores in setting up a state of the art network, for serving millions of subscribers and for contributing to the national tele-density objectives, for being the second largest rural mobile service provider in India."

This latest setback for the British firm comes as its tax dispute with the Indian government shows no signs of abating. The company is facing a tax bill of £1.3bn in connection with a deal with an Indian telecom company, Hutchinson Essar.

After much legal wrangling that raised concerns about the viability of foreign firms investing in India, finance minister Palaniappan Chidambaram recently adopted a conciliatory tone, indicating that the government may consider a settlement on the issue.

But the problem appears to be far from over, as India's law ministry has opposed the current method of settlement, citing legal conflicts, reports the Indian television channel NDTV. The ministry claims that the Income Tax Act does not allow dispute settlements outside the act.