After receiving the same error, repeatedly — even after updates — I found a way to get it to work assuming you're working on Ventura 13.0.1 (22A400):
Ready terminal command: xcode-select --install
Open Settings > General > Software Update
Run the command, follow the prompt to install, then this will pop up while it's downloading
Initiate the update in Software Update simultaneously
The terminal command's prompt finally returns this:
Updates remain available in Software Update, but "Update Now" doesn't make anything happen
Return to terminal & run: xcode-select -p
Mine returns "/Applications/Xcode.app/Contents/Developer" — so I ran this: sudo xcode-select --switch /Library/Developer/CommandLineTools
Voilà, Xcode command line tools are recognized as updated. You can check xcode-select --install to see the return "xcode-select: error: command line tools are already installed, use 'Software Update' in System Settings to install updates" Now the command line tools work as intended.
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See if /usr/bin/cc --version returns
Target: arm64-apple-darwin22.X.X
Thread model: posix
InstalledDir: /Library/Developer/CommandLineTools/usr/bin
If it's close to that, everything should be good. If not sudo xcode-select --switch /Library/Developer/CommandLineTools should solve it: I'm assuming the install directory was altered during an update or abrupt uninstall.