No question that the best AVRs have the ability to turn off any processing for an individual source.
For my money, the Marvell chipset used by the Pioneer SC-35/37, VSX-32/33, and VSX-1120 is the best you'll find. After that come several iterations of Anchor Bay chipsets, most of which are very good, some of which are excellent. Faroudja is simply not in the league of anything produced by ABT or Marvell.
I would agree that most Blu-ray players should have no processing on BD content. However, for upscaling standard DVD, a Marvell or ABT based AVR will do a much better job than a number of Blu-ray players (PS3 included). Ideally you would want to be able to control turning conversion on or off on a source fairly easily (not three menus deep). Then again, if you have a Blu-ray player that already has top flight upconversion (for example an Oppo), that's a non-issue.