@skekatpuray --py-files is for command line only. Try using spark.submit.pyFiles instead with Livy. You should add this via Spark configurations in "conf" field of REST. Check this link for more information:
For people using incubating mode of livy for first time,kindly check that the template file is renamed with stripping off .template in livy.conf.template.Then make sure that the following configurations are present in it.
livy.spark.master = local
Kindly make sure that forward slash is present in end of path