Can anyone please explain if the quality of the story/character/screen-play development impacts the art direction of individual scenes or entire movie as a whole? With which criteria does the Academy of the Arts and Sciences judges the nominees in the Best Art Direction category?

Well I can tell you that Pans Labyrinth has just won Best Art Direction for 2006; and by it's nature, this screenplay requires elaborate sets and costumes. I could not tell you with any authority the criteria used by the Academy, but a guess would include factors like originality of approach; aesthetic appeal; consistency of approach across the entire film; sympathetic use of colour and set to explicate the screenplay. There must be some exact info on the web somewhere. Good luck.