I just re-read the last 2 or 3 pages of this thread and think there is a confusion on what AC3 decoding means. For the ones who have a playstation 3 will see the difference since it uses the bitstream terminology to refer to LPCM 5.1 as I recall.
The AC3 bitstreaming setting is probably decoding AC3 into multichannel LPCM 5.1 therefore can only be sent via HDMI (S/PDIF does not have that capability , only PCM 2.0 and DD 5.1 since it requieres more bandwith) to a compatible receiver (not every receiver and probably none TV will decode this). Most DD receivers as well as most TV's will only work with compressed AC3 or uncompressed PCM 2.0 , see the difference here?, only 2 uncompressed digital audio channels or 5.1 compressed DD audio tracks.
probably ike Jim said , for copy protection reasons (and also it makes no sense to receive audio on a TV via HDMI (high bandwith capable) to send it back to a receiver via S/PDIF (low bandwith capable) no TV will send audio via S/PDIF that came via HDMI. My high end Samsumg 4071 does not BTW.
If you have no audio receiver then connect the sat box to the tv with hdmi and then let the sat box send either AC3 or PCM 2.0 to the TV via HDMI (let the TV do the decoding and even in that case the final D/A conversion to drive the TV speakers). But if the sat box sends LPCM 5.1 via HDMI you are screw since the TV will not process this. Most devices will decode AC3 into PCM 2.0 instead (like probably the AZbox is doing) not LPCM 5.1 which is the prefered method.
If you have an audio receiver , DD capable , all fairly new are, and want to impress your friends (lots of people did it with DTS MA and DD True HD where all you needed was a receiver and a BD player that were LPCM 7.1 capable, no need to buy an expensive True HD receiver like I did) with the 5.1 icons lighting up then do the same and let the receiver in this case do the processing. Set tv speakers to off and even tell the receiver not to send audio to TV because there is no need for it.
If you have an audio receiver that is not DD 5.1 capable then you are screw , you will need the sat box to decode AC3 into PCM 2.0 and then you can process that audio pretty much like a TV does.
If you have a fully capable receiver you could let the sat box decode AC3 into LPCM 5.1 and send it via HDMI and then let the receiver do the D/A processing. Or to releive the sat box from that processing power then just send the AC3 audio straight to the receiver and enjoy the 5.1 icons, lol. Remember S/PDIF due to bandwith contraints can only handle either PCM 2.0 or AC3. PCM and LPCM is the same thing by the way , total amount of discrete digital audio channels either 2.0 or 5.1 or 7.1 determines which connction you can use , either S/PDIF or HDMI.
As usual I could be wrong though.