Sugar cane can be placed/planted on sand blocks even when the sand is surrounded by water source blocks. The water surrounding the placed sugar cane will not flow back into the spot where the sugar cane should not be able to stay.

In order to recreate this, find 1 block deep water that is surrounded by no more than 1 block directly North, East, South, or West, replace the bottom block below the water with a sand block, place a piece of sugar cane on the sand block.