The 2nd h:selectOneMenu is not rendered during the initial rendering, so when it is updated the client framework doesnt know where to put the replacement from the AJAX response.
Try placing the h:selectOneMenu within an a:outputPanel and reRender that instead.
Hats Off to you.
Thanks a lot for your help. Its working now.Wanted to give more rating but could not due to some workspace problem. Sorry for that.