Sugar cane can be placed in water, when the water block of sand it is being placed on has water adjacent and one block below.
It is expected that sugar cane cannot be placed in these positions:

Screenshots: https://user-images.githubusercontent.com/37492454/37697888-322ee678-2ce8-11e8-95e7-9f7a366c0fa2.png
https://user-images.githubusercontent.com/1007849/37702543-fdc4fb20-2d46-11e8-82bb-1e32b0f09a3a.png