Thats absolute ok...I had the same problem long time ago with cloth ... but I don't know anymore what the issue was...  ;-)  maybe it was a "normals" problem.
You can send me the Armor only and I can do some tests here , looks like only the Armor has the polygon problem , right?

That's the entire character poly count. The armor is around 65,000.

The tessellation is working when viewed in wire frame. 

I modeled the armor myself in blender, imported into CC3 to conform and weight etc. I made it as low poly as possible as I knew i could smooth it in CC3.

Will try the FBX export. Thanks

where is that amor from , daz or any other source? (over 700.000 Triangles) why so much , is it the cloth or the hair?
What you also can test , is to import the Character via FBX ,  maybe it is a normal problem , import it with " Normal Import Method" = "Compute Normals" ... and also try "Import Normals and Tangents"  how does it look then?

Iclone no tessellation/subdivision:



CC3 no tessellation/subdivision

Also do a wireframe check if tessellation is working right. (from Lit mode to Brush Wireframe)

1. No Tessellation



2. Tessellation 1 ... you also can go higher... do you see a difference in the wireframe?

Hmm , can you show a picture of IClone with the Armor without Subdivision or Tessellation ?

Yep looks the same as yours.

Please take a look if tessellation is activated for your Armor.
1. 


2.

Just tried it but it had no effect :(