What you are actually using is the command to install the Xcode command line tools – xcode-select --install. Hence the error message you got – the tools are already installed.

The command you need to update Xcode is softwareupdate command [args ...]. You can use softwareupdate --list to see what’s available and then softwareupdate --install -a to install all updates or softwareupdate --install <product name> to install just the Xcode update (if available). You can get the name from the list command.

As it was mentioned in the comments here is the man page for the softwareupdate tool.

2019 Update

A lot of users are experiencing problems where softwareupdate --install -a will in fact not update to the newest version of Xcode. The cause for this is more than likely a pending macOS update (as @brianlmerritt pointed out below). In most cases updating macOS first will solve the problem and allow Xcode to be updated as well.

Updating the Xcode Command Line Tools

A large portion of users are landing on this answer in an attempt to update the Xcode Command Line Tools. The easiest way to achieve this is by removing the old version of the tools, and installing the new one.

sudo rm -rf /Library/Developer/CommandLineTools
xcode-select --install

A popup will appear and guide you through the rest of the process.