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tesselation ability was built into the specifically made GPU and CPU it's just no-one has used it yet.
The 360 has the ability without the need for DX11.

The new game engine MS has sent out with the new dev kits finally allows it to be used.

It's not watered down as they havent seen what a pc can do and decided to try and recreate it on the 360.
It's a feature of the 360.