I have added the .aar files to libs folder in the sub-project. And have given the repositories as:
repositories { mavenCentral() mavenLocal() flatDir {
You need to set the dependencies too:
compile fileTree(dir: 'libs', include: ['*.jar','*.aar'])
This can be done in the subprojects build.gradle.
Edit: You might need to specify the file itself:
compile(name:'name-of-file',ext:'aar')